What Is a Credit Score and What Can You Do About It?

Robb NelsonMortgage Talk Canada

To many people your credit score is this shadow that follows you around your entire financial life that you don’t understand. You know its there, you know it affects you, but you don’t want to look at it too hard until you must. This is understandable, no one makes you look at it and until you need it it’s very easy to pretend it doesn’t exist. So, let’s start with the basics.

What is your credit score – Your credit score is a number that reflects to a lender how likely you are to repay a loan. This number ranges from 300-900 with the magic number (for the most part) being 650. If you’re below 650, you’ll have a hard time getting a traditional lender like a bank or credit union to lend to you.

What factors affect your credit score – Your credit score is affected by your payment history, your credit vs. your available credit, the length of your credit history, public records, and number of inquiries into your credit file. The two factors that affect you the most are payment history with a weight of roughly 35% of your credit score and your used credit vs. your available credit, also called ‘utilization’, with a weight of around 30%.

What you can do to change your credit score – As mentioned above, the two major factors are your payment history and your used vs. available credit. Payment history is the more difficult to change out of the two, you need to ensure that all your bills are always being paid and on time. This requires dedication and eventually, over the course of a few years, missed payments will disappear and your credit score will rise.

In the short term however, it is much easier to affect your credit score by understanding how utilization affects it. Utilization, as stated above, is your used credit vs. your available credit and ideally this percentage should be under 50%. Say you have a credit card with a $5,000 limit with $4,500 on it, and a line of credit for $20,000 with $3,000 on it, in this case the credit card is at 90% utilization which is above the target and will be affecting your score negatively. You can get yourself to 50% utilization in a couple ways, the most obvious being putting enough of a payment on the credit card to bring it back under that 50% mark. If this isn’t something you’re able to do, try shuffling money from one debt source to another. Taking $3,000 from your line of credit and putting it on your credit card will bring the credit card down to 30% utilization. Another way is to call the credit card company and see if you can get your credit limit raised to a point where your utilization is in a better situation. If you use any one of these tips alone or in combination, you will see an immediate result on your credit score that will help bring you to that magic number.

Your credit score can be a very confusing thing to understand. If you need help managing yours contact Family Lending and their mortgage professionals will do all they can to get you where you need to be.

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