As a concept, most Canadians are familiar with credit rating as a number between 300 and 900 that reflects your creditworthiness. Creditworthiness being the golden standard that helps secure loan approval for lenders.
But, does anyone actually know how credit ratings work? The fact is, outside of rating agencies nobody really knows how they work. Both Equifax and TransUnion, the two Canadian credit rating agencies, don’t publicly reveal the formula they use to calculate a credit score. This is mainly to make sure you’re not able to tweak the system to get a better credit rating.
Still, there are some basic factors you can monitor to improve your credit. Credit ratings are generally determined by adding up five factors:
- Payment history = 35 per cent
- Amount owed = 30 per cent
- Length of history = 15 per cent
- New credit = 10 per cent
- Types of credit used = 10 per cent
Now that you know the breakdown, it can help with making sure your rating doesn’t suffer.
Here’s are four factors that you should remember to better manage your credit:
A zero balance on your credit card can drag your credit rating
Its always good to remember that lending money is a business. Lenders and financial institutions such as banks make money by charging interest.
If you pay off your debt all the time, and you don’t pay any interest, that actually hurts your credit rating. Lenders want to know if you are someone who can pay a bit of interest. The best way to show a lender or a bank that you’re a good bet is to show them you can pay the interest on a loan.
It is important to remember that a credit score is a measure of how much lenders will want your business. Even though that zero balance helps you sleep at night, avoiding interest does not necessarily win you favours with banks.
Hang on to your very first credit card
That credit card you signed up for in your first year of university wandering around campus is possibly the very beginning your credit history. To keep it active shows lenders that you’ve been responsibly managing debt since your college days.
Showing that you’ve been borrowing money and paying it back for a long time helps up your credit management game, and so drives up that credit score.
Credit diversity is a good thing
If you have a car loan, unpaid student debt, a mortgage, and some charges on your credit card, how exactly does this affect your credit score? This will depend on how well you manage all your debt obligations. Generally speaking, diversity is a good thing when it comes to credit.
A variety of different types of loans that are well managed is actually a plus point for your credit rating. If you have all of your debts under control, and you are doing well on managing payments on all of them, then it will affect your score positively.
Credit rating is prone to errors, so scrutiny is good
It’s not common to pull your credit report and discover an error. About 30 per cent credit reports contain mistakes, some of which could saddle you with a higher interest rate or see you denied credit altogether.
If you find something wrong in your credit report, immediately flag it with the credit agency. Make sure to stay on top of all your records. Yearly bookkeeping for your personal finances is really important. Especially when it comes to catching mistakes.
Just go through and make sure there aren’t any errors on your credit rating. You want to be absolutely sure that you clear up anything that doesn’t add up. This will boost your rate.
While these factors won’t help obtain your perfect credit score, keeping these things in mind will definitely help you manage your credit better.