When it comes to most kinds of scores it’s generally better to have a higher number.
The same holds true for a very important figure related to your financial wellness – your credit score.
Here, with insight from a couple of CWB experts from our B.C. region, we’ll give you a primer on this often heard – but sometimes not well understood – indicator, as well as some tips to help elevate it to a win.
First, some basics
A credit score is a three-digit number that reflects how well you manage credit. Why does this matter? How well you manage credit shows lenders how risky it would be to lend you money.
“Good credit is essential when it comes to lending,” says Dennis Ragauskas, Manager, Personal Banking. “It can help you negotiate your mortgage or loan and it could possibly lead to better rates or more favourable terms. The bank or financial institution will aways look more favourably on the borrower with good credit. On the flip side, if your credit’s really poor, you might not be able to get any more credit.”
Your credit score is calculated using a formula based on your credit report. Credit scores from 660 to 900 are generally considered good, very good, or excellent. In simplest terms, responsible credit use gets you more points, while not-so-great credit management results in points taken away. The good news is your credit score changes over time as your credit report is updated. That means if it’s not great, you’re not stuck with it forever – in fact you can help move the needle in your favour by diligently following some best practices that we’ll get to in a little bit.
What exactly is on your credit report? Well, it shows the personal and financial information the credit bureaus have collected about you. This includes any public records (e.g. judgments), any companies who have pulled credit reports on you, and the names and addresses of your employers. In general, it takes 30 to 90 days for information to be updated in your credit report.
Ok, so before we dive into what affects your score and some tips for improving it, let’s touch quickly on credit bureaus – since we just mentioned they pull together your credit report and score. A credit bureau is a private company that collects, stores, and shares information about how you use credit. In Canada there are two main credit bureaus – Equifax and TransUnion. They only collect information from creditors about your financial experiences in Canada.
We went through all that pretty quickly. If you’d like to delve deeper into this topic, here are a few handy resource links we referenced when putting together this intro:
Credit report and score basics (Canada.ca)
What is a good credit score? (Equifax Canada)
What is a credit report and a credit score? (TransUnion Canada)
4 things that can impact your credit score
To understand how to improve your score, it’s helpful to have a sense of what got you there in the first place. Here’s an overview of some key impactors.
#1: How much credit you have. In other words, all your credit cards, lines of credit, and any other financing. Pro tip: “If you’ve been pre-approved for a mortgage be aware that if you go out and get more credit in that interim period it might affect your pre-approval,” says Ragauskas.
#2: How much of that credit you’ve used. This means out of all your available credit how close you are to maxing it out.
#3: Your payment history. Are you making payments on time and consistently? Or are you constantly missing them and incurring interest? Are you always carrying forward a balance?
#4: Multiple and sustained applications for lending. While a reasonable amount of shopping around for a good lending arrangement can reflect due diligence, if there are continuous credit inquiries happening over a period of months and you’ve also fully utilized all your available credit (and are having trouble with payments) that’ll impact your score and be a big red flag for lenders. “If there are, for example, 10 inquiries over a three-month period then that’s not normal behaviour and is a sign someone has problems with credit management,” says Ragauskas.
Alright, so now that you have an idea of what can impact your score, let’s look at some tangible things you can do to increase it. You’ll notice these are all pretty intuitive and there’s no magic bullet – it really boils down to responsible credit use and not spending more than you have the means to pay off.
6 strategies for improving your credit score
#1: Pay your credit card bills on time, every time – and, if you can, avoid carrying forward a balance. “This is kind of a no brainer, but sometimes people don’t connect the dots on how simply paying off what you owe consistently and on time really matters,” says Sam Al-Khazraji, Account Manager, Personal Banking.
#2: Find out the date your credit card gets reported to the credit bureau (hint: this is different from your statement due date). Your credit report changes when a creditor sends an update about one of your accounts to one of the credit bureaus. “If you want your latest payment and utilization to be reflected in your credit report and score, find out when your credit card company sends this information to the credit bureau,” says Al-Khazraji. “You can do this by calling the credit company directly or by contacting a company like Credit Karma.
#3: Stay well below your available credit utilization limits. “How close you are to your limits will impact your score,” says Ragauskas. “And even more so if you’ve fully utilized your credit and you’ve missed payments because it shows you don’t have the money to pay down what you owe."
He adds in a case where you’re regularly hitting your limit but are also consistently paying it off on time, you might consider asking your credit card company for a limit increase. This can help improve your score – as long as your spending doesn’t also increase with the limit.
Pro tip: “A general rule is to keep your credit utilization at around 10% or less and to get it to that level before the date your credit card company sends your information to the credit bureau,” says Al-Khazraji.
#4: Use your credit. Ok, yes, we just cautioned against maxing out your credit limit. But there’s also an aspect of use it or lose it – having credit available but not doing anything with it can also bring down your score. “The credit bureau looks at your credit utilization and if you’re making the payments. So if you’re not using your credit, it may surprise you to learn this can work against you,” says Al-Khazraji. “A simple way to keep your credit active is to find out the date your credit card company sends your information to the credit bureau and then regularly make a small purchase and pay it off before that date.”
#5: Monitor your credit report and score. It can be tough to move forward if you don’t know where you stand, so reviewing your report and score at least once a year is a good place to start.
“You should be monitoring your credit not just for your score, but also for fraud,” says Ragauskas, explaining you can ask your credit bureau for a copy of your report or find out your score through companies like Credit Karma. However, if you want continuous detailed monitoring, Ragauskas adds you might want to consider using a paid service. “Regular monitoring – which you can get through Equifax or TransUnion – gives you more information on an on-going basis and will alert you to any changes that might indicate fraud. For example, if someone is applying for lending using your identity,” he says.
#6: You’re not alone in this – reach out to your banker for help. “We have access to credit reports and can help you diagnose and address issues that may be affecting your score,” says Al-Khazraji. “For example, say your phone bill is $100 and they only collected $95 from you. That can actually impact your credit score. Or say you have a $10,000 line of credit and you went $10 over that. That can hurt you, too. We as bankers can support you in fixing issues and can set you up with tools like automatic payments to your credit card that can help prevent problems in the future.”
Pro tip: The CWB Rewards Mastercard® and the World Elite® Mastercard® both have features that can help with credit management, such as the ability to request a credit limit increase within the application, installment pay, and cashback redemption.
Bringing it all together
So that, in a nutshell, is an overview of what a credit score is, why it’s important, what impacts it, and how you can improve it. It’s a pretty important aspect of your financial wellness and certainly something you’ll want to stay on top of with the help of a few tools, resources, and support from your banker.
And while learning about your credit score might seem like a lot to chew through, it does make a difference. Al-Khazraji leaves us with this final food for thought.
“Even if you have the highest income, if you’re not within that good credit score margin then your financial situation can get complicated – you might not be able to get that dream home or car or other type of financing. It’s really one of the most important factors to financial stability and it’s in your best interest to improve and maintain a good score,” he says. “That three-digit number really can impact your life in a positive way or it can unfortunately make things way more difficult.”