Understanding the Importance of Credit

Your credit score is a 3-digit number that represents the status of your credit history. Generally, the higher your credit score is, the higher the possibility you have to demonstrate strong payment behaviour. When you go to see a lender, they will use your credit score as one factor when making certain decisions (if you can get a loan or how much you will be given). Unfortunately, there is no quick fix for a lower credit score, but there are tools and habits you can use to improve it over time.

There are two nationwide credit reporting agencies or credit bureaus that lenders use to help keep track of your score. Equifax and TransUnion are used by a lender to report your lending products and credit history payments.

In order to generate a credit score, you need a minimum of two lines. Those lines can be a phone bill payment or a credit card. Paying your bills on time and paying more than the minimum payment is a great tactic to improve your credit score. If you can, try to keep your credit card balance well below its limit or by 35%. It’s a good idea to avoid applying for multiple credit cards and loans and to check your credit report regularly.

Here are five ways that will help you maintain and improve your credit score.

1. Pay the minimum payment (at least) on your credit card, and make sure to do so on time. This will aid you in paying off your credit card affordably. If you make a late payment, your financial institution may report the late payment to a credit bureau. If this happens, that record will be on your report for six years and can negatively affect your scores.

2. If you can, try to pay more than the minimum payment on all your credit cards or other loan payments. This will help you pay your debts off faster which will lower the interest you pay, which will lead to higher credit scores.

3. Pay all of your bills on time. No matter what, always ensure you pay your utilities, rent, or cell phone bill on time. A good mindset to get into is to split your bills across your paycheques so paying them won’t seem as stressful. For example, if your phone bill is $100, and is due at the end of the month, instead of taking the full amount out of one paycheque, divide the total bill amount by two and put that amount aside from the other paycheques you receive. That way, your bill payments will feel more reasonable.

4. Keep your credit card balance below your credit limit. When the balance reaches your credit limit, it may impact your scores.

5. Check your credit reports regularly. There are two nationwide credit reporting agencies – Equifax and TransUnion, both of which maintain consumer credit reports holding information reported to them by lenders, creditors, and other sources. This will help keep you on track and keep you accountable.

Financial institutions will use your credit report almost like a report card to see your credit track record. It will show them how much money you have borrowed in the past and how fast you have paid it back. A prospective employer or landlord may run a credit check to ensure you have a clean record and that you can afford to make payments.

Whether you’re applying for a credit card, mortgage, or loan, there are 5 factors that impact your qualification, and we call them the five C’s of credit.

• Capacity – Your ability to repay

• Character – Your willingness to repay

• Capital – Your financial stability

• Credit – A record of your repayment history

• Collateral – The value of your assets that are available in case you are unable to make payments

Understanding credit and how much it can directly affect different aspects of your life can be stressful. Meeting with a financial advisor is a great way to get a handle on credit and come up with a plan of action that is sustainable and maintainable for you and your lifestyle. Don’t let credit control your life but know that you can control your credit!