#MakeItMakeSense is a series from the Star that breaks down personal finance questions to help young Canadians gain more confidence and understanding around financial literacy.
Maintaining and understanding your credit score can be overwhelming to say the least and even the most knowledgeable people make simple mistakes that can poorly impact their credit scores.
Credit, as our money expert Jessica Moorhouse explained, is the ability to borrow money from a lender so you can access goods and services now, but pay for them at a later date, plus interest.
When it comes to credit scores, Moorhouse said while many people obsess about the specific number, all that matters is that you have surpassed a certain threshold.
For example, at one of Canada’s two main credit bureaus, scores above 660 are considered good, above 725 very good, above 760 is excellent, Moorhouse noted. At the other, scores above 650 are considered good, above 720 very good, and above 800 excellent.
“The goal is to be in the good range at least, but ideally very good or excellent,” she said.
“A credit score is just an indication to a lender of, ‘Is this person trustworthy with credit?’ ‘Can I trust them to pay back what they borrowed?’”
So how can we work toward improving our credit scores? We asked Moorhouse to give us her tips and #MakeItMakeSense.
How can I be more responsible with credit payments?
The two main credit bureaus in Canada are TransUnion and Equifax. Not only do the two bureaus have differences in credit scoring models and calculations, but lenders often only report to one or the other. For example, your credit card might report to one, but your student loan, the other.
With that in mind, Moorhouse advised people to keep tabs and look for any indications as to why their score may be lower than expected, or if there are errors.
“If your credit score isn’t where you want it to be, you can make changes to change that in the future. (Credit scores) are a snapshot in time of how you have been with credit in the past,” said Moorhouse.
Moorhouse emphasized the importance of always making payments on time. Even if you can’t afford to pay the full balance right away, it is better to pay the minimum rather than not pay at all.
She added if people are having trouble paying a bill, they can also contact their lender to see if they can work out a different payment program that fits their situation and does not negatively impact their credit score at the same time.
Why is credit history important?
The longer you’ve had credit, the better your score will be, as long as you’ve been responsible with it, explained Moorhouse.
She has had a credit card for 15-plus years and usually aims to put one purchase on it every year to maintain it.
“Think of it from the perspective of a lender. You’re looking at one applicant for a loan who has 15 years of credit and one who has only two years. Who do you think is going to be the bigger risk? The one who hasn’t been able to have that much history to show? Or the one who’s been doing it for 15 years?”
Moorhouse added if there are people who want to switch credit cards to, for example, avoid an annual fee, they can contact their credit card company directly and see if there are options to maintain their credit history while switching to a new card.
What is a hard credit check versus a soft credit check?
Moorhouse said a key to recognize and better understand your credit history is knowing the difference between a hard credit check and a soft credit check.
“A hard hit means it will negatively impact your credit score. It will kind of lower it because it was a hard pull of your information,” she said, adding people give permission for lenders to do this type of check.
Hard hits include applying for a loan or credit card, as well as rental and employment applications where lenders pull your credit prior to approving your loan application and determining what terms they may present to you.
In comparison, soft credit checks will not show up on your reports or negatively impact your credit score. According to TransUnion a soft credit check “is a more routine check that can be done without your permission.”
“If you check your credit score, that’s considered a soft hit. Businesses asking for a credit report to update records is also considered a soft hit,” said Moorhouse.
What happens if I complete multiple credit applications at the same time?
Moorhouse said it is not a good idea to complete multiple credit applications in a short amount of time, such as opening several credit cards for incentives and then closing them shortly after.
This is because to lenders it comes off as you being overextended or in a hurry to access credit, which could lead them to assume you don’t have enough savings, she said.
“In general, it’s not a good idea to apply for a car loan and five credit cards all at the same window because lenders will be like, ‘What’s going on?’ and then it’ll also be reflected in your credit score,” she said.
“In other words, you don’t want to come off as desperate for credit because it may signal that you won’t pay it back as you promise.”
If you don’t get approved for credit, applying for multiple types of credit may actually hurt your credit because each application is considered a hard credit check and will thus lower your score, she explained.
“That’s why it’s important to review your credit reports and fix any errors and have a good idea of what your credit scores are before applying for credit and risking being rejected,” she said.
“In other words, if you think you won’t get approved, wait, improve your credit scores, then apply.”
Got a question or scenario that you’d like to see tackled? Reach out to Madi via email email@example.com and we’ll #MakeItMakeSense.