Your credit score plays a critical role in your financial life. It affects your ability to obtain loans and credit cards, as well as your insurance premiums and job opportunities. However, many people must know the factors influencing their credit scores.
In this article, we will give you insight into the secrets of your credit score and provide tips on improving it!
Payment History
Your payment history is the most critical factor in determining your credit score. Payment history accounts for 35% of your credit score, so timely payments are crucial. Payments that are missed or defaulted on loans can impact your score. It’s important to pay bills on time.
Utilizing Your Credit
Utilizing your credit refers to the available credit you are using. Using high percentages of your credit limit can signal to lenders that you may be overextended financially. It is generally recommended to keep your credit utilization below 30%.
Credit utilization accounts for 30% of your credit score, making it the second most important factor. If you have high credit card balances, consider paying them down to improve your credit utilization ratio.
Length Of Credit History
Your credit history’s length is another factor impacting your credit score. Lenders want to see a long credit history that shows responsible borrowing behaviour. If you are starting, establishing a credit history may take some time.
However, it’s crucial to start building credit early by opening a credit card or taking out a small loan. The length of your credit history accounts for 15% of your credit score.
Types Of Credit
A variety of credit can positively impact your credit score. Lenders like to see you can handle different types of credit responsibly. If you don’t have a mix of credit types, consider diversifying your credit portfolio by opening a new credit account or taking out a small loan.
Recent Credit Applications
Recent credit applications account for 10% of your credit score. Applying for heavy amounts of credit in a short period can negatively impact your credit score. Lenders will typically perform a hard credit inquiry, which can temporarily lower your credit score.
Errors On Credit Report
Credit report errors are not uncommon and can impact your credit score negatively. It’s crucial to check your credit report regularly and dispute any errors you find. You are entitled to one free credit report from each major credit bureau annually.
Reviewing your credit report and disputing any errors can help ensure your credit score accurately reflects your creditworthiness. You should review your credit regularly at each of Canada’s bureaux, Equifax and TransUnion.
For more information on how to request a free credit report, see Getting your credit report and credit score from the Financial Consumer Agency of Canada.
Closing Old Credit Accounts
Closing old credit accounts can impact your credit score. Closing accounts can shorten your credit history and lower your credit utilization ratio. Keeping old credit accounts open can help maintain a long credit history and improve your credit score.
The Impact Of Collections
A collection account can significantly impact your credit score, even if the amount owed is small. If you have a collection account, paying it off immediately is essential. While it may not immediately improve your credit score, it will prevent further damage to your credit score.
Related Resource: Credit 101
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!