8 Credit Score Secrets You Need To Know

Your credit score is a strong indicator of your financial health and shows your ability to borrow and repay money responsibly. It’s one of the main tools that banks, credit card companies, and other institutions use to assess your eligibility for a mortgage loan.

In this article, we will give you insight into the secrets of your credit score and provide tips on improving it!

1) Payment History

Your payment history is the most important factor affecting your credit score, making up 35% of the total. This means that consistently making payments on time is essential for maintaining a strong credit profile.

Late payments, missed bills, or defaults on loans can significantly damage your score, making it harder to qualify for credit in the future. Even a single missed payment can remain on your credit report for several years, influencing lenders’ perceptions of your reliability.

To protect your credit score, prioritize paying your bills on time. Consider setting up automatic payments or reminders to help you stay organized. Establishing a solid payment history not only improves your credit score but also enhances your overall financial health, making it easier to secure loans and favorable interest rates when you need them.

2) Amount Owing & Utilization

Credit utilization refers to the percentage of your available credit that you are currently using. High levels of credit utilization can signal to lenders that you might be overextended financially, which could impact their decision to extend credit to you. To maintain a healthy credit profile, it’s generally recommended to keep your credit utilization below 30% of your total credit limit.

This factor accounts for 30% of your credit score, making it the second most significant aspect after payment history. If you find that your credit card balances are high, consider making efforts to pay them down. Reducing your credit utilization can have a positive effect on your credit score, demonstrating to lenders that you are managing your credit responsibly.

In addition to paying down balances, you might also explore increasing your credit limits—if your financial situation allows. This can help lower your utilization ratio without needing to decrease your spending. Regularly monitoring your credit utilization and making adjustments as needed can help improve your overall credit health and position you favorably for future credit applications.

3) Length & History

The length of your credit history is an important factor that influences your credit score. Lenders typically prefer to see a longer credit history, as it provides insight into your borrowing behavior and financial responsibility over time. A well-established credit history indicates that you have experience managing credit, which can make you a more attractive candidate for loans and credit products.

If you’re just starting out, building a credit history will take some time, but it’s essential to begin this process early. You can establish credit by opening a credit card, which can be a good way to demonstrate responsible spending and timely payments. Alternatively, taking out a small loan can also help build your credit profile.

The length of your credit history accounts for 15% of your overall credit score, so even if you have limited credit experience now, taking proactive steps can have long-term benefits. As your credit history grows, it will contribute positively to your score, making it easier to qualify for favorable rates on larger loans, such as mortgages or auto loans, in the future. Remember, patience and responsible management are key to developing a solid credit history.

4) Types Of Credit

Having a diverse mix of credit can positively influence your credit score. Lenders appreciate seeing that you can manage different types of credit responsibly, such as credit cards, installment loans, and retail accounts. This variety demonstrates your ability to handle various financial obligations and suggests that you are a well-rounded borrower.

If your current credit profile lacks diversity, consider taking steps to diversify your credit portfolio. You might start by opening a new credit card or applying for a small personal loan. These options can provide you with the opportunity to showcase your ability to manage different forms of credit.

It’s important to approach diversification thoughtfully. Only apply for credit accounts that you genuinely need and can manage responsibly. By maintaining timely payments across all your accounts, you can further enhance your credit profile. Remember, the goal is not just to increase the number of accounts, but to demonstrate that you can handle your credit obligations effectively. This strategic approach can lead to improvements in your credit score, ultimately making you more attractive to lenders for future borrowing opportunities.

5) Recent Applications & Checks

Recent credit applications represent 10% of your credit score, making this factor important in how lenders assess your creditworthiness. When you apply for multiple credit accounts in a short span of time, it can signal to lenders that you may be in a precarious financial situation, which could negatively affect your credit score.

Each time you apply for credit, lenders usually conduct a hard credit inquiry to review your credit report. While this inquiry is a necessary part of the application process, it can cause a temporary dip in your score. If you have several hard inquiries within a brief period, the cumulative effect can be even more pronounced, making lenders wary of your creditworthiness.

To mitigate this impact, it’s advisable to space out your credit applications. Instead of applying for several credit products at once, consider evaluating your financial needs and applying for credit only when necessary. If you’re shopping for a loan, such as a mortgage or auto loan, most credit scoring models allow for multiple inquiries within a certain timeframe (usually 30 days) to be treated as a single inquiry. This means you can explore options without significantly harming your score.

Being strategic about your credit applications not only helps protect your credit score but also positions you more favorably in the eyes of lenders, enhancing your chances of approval when you truly need it.

6) Errors On Credit Report

Errors on credit reports are not uncommon, and they can have a significant negative impact on your credit score. This makes it essential to check your credit report regularly and dispute any inaccuracies you encounter. In Canada, you are entitled to one free credit report each year from each of the major credit bureaus, Equifax and TransUnion.

By reviewing your credit report thoroughly, you can identify and address any errors that may misrepresent your creditworthiness. This proactive approach helps ensure that your credit score reflects your true financial situation, which is crucial for securing loans and credit at favorable terms.

To access your free credit reports, visit the websites of Equifax and TransUnion. Additionally, the Financial Consumer Agency of Canada provides helpful resources on how to request your credit report and score. Regularly monitoring your credit not only helps you catch errors but also allows you to track your financial progress and make informed decisions about your credit management. Taking these steps is vital for maintaining a healthy credit profile and achieving your financial goals.

7) Closing Old Accounts

Closing old credit accounts can have a significant impact on your credit score. When you close an account, especially one that has been open for a long time, you may inadvertently shorten your credit history. A longer credit history is generally viewed favorably by lenders, as it reflects your experience with managing credit over time.

Additionally, closing accounts can affect your credit utilization ratio, which is the percentage of your available credit that you are currently using. By reducing your overall credit limit—since you no longer have access to the closed account—you may increase your utilization ratio if you carry balances on your other accounts. A higher utilization ratio can negatively impact your credit score.

For these reasons, it’s usually beneficial to keep old credit accounts open, even if you don’t use them frequently. Maintaining these accounts can help preserve a long credit history and keep your credit utilization ratio lower, both of which can contribute positively to your credit score.

However, it’s important to monitor your old accounts for any potential fees or issues. If an account charges annual fees and is rarely used, you might weigh the cost against the benefits of keeping it open. In such cases, consider discussing with your lender the possibility of converting to a no-fee card or product. Overall, strategic management of your credit accounts can help you maintain a healthy credit profile and enhance your financial opportunities.

8) The Impact Of Collections

A collection account can have a substantial negative impact on your credit score, regardless of the amount owed. Even small debts that go to collections can tarnish your credit profile, making it more difficult to qualify for loans or favorable interest rates in the future.

If you find yourself with a collection account, it’s crucial to take action and pay it off as soon as possible. While paying off a collection may not lead to an immediate boost in your credit score, it is a vital step in preventing further damage. Once the account is settled, it may be marked as “paid” or “settled,” which is more favorable than leaving it unpaid.

Additionally, many creditors and lenders view accounts in collections as a red flag, which can hinder your chances of obtaining new credit. By addressing the debt promptly, you demonstrate responsibility and a commitment to resolving your financial obligations.

After paying off the collection account, consider monitoring your credit report to ensure that the payment is accurately reflected. If there are inaccuracies, you have the right to dispute them with the credit bureaus. Over time, as your overall credit history improves through responsible credit behavior, the impact of the collection account will diminish. Taking proactive steps now can pave the way for a healthier credit profile in the long run.

Related Article: Optimize Your Credit Score with Multiple Credit Cards

Your credit score is a crucial aspect of your financial life. Understanding the factors that impact your credit score can help you maintain a good credit score and improve it over time. Responsible borrowing behaviour, such as paying bills on time and keeping credit utilization low, can help improve your credit score.

Reviewing your credit report regularly, disputing errors, and keeping old credit accounts open further improves your credit score. Keeping all these things in mind will help keep your credit score low. All these are a must-do!