Adulting is hard, especially when you're trying to weave through a world of late payments, loans, and credit ratings with a complete lack of financial literacy.
But just because they didn't teach us how to handle debt and save for a mortgage in high school (like they do now), doesn't mean we can't get educated to try and save our future selves, right?
Narcity spoke with Angela lermieri, a financial planner and spokesperson for Desjardins, who gave us the 411 on how to master our credit scores.
How a credit score is calculated?
"A credit score is calculated using information from your credit report. So, your credit score is a number," lermieri says.
"When you start getting credit, obviously, it's calculating the credit that you're given and that lenders give you. So, if you have no credit, you will not have a credit score. And the same thing goes for credit history, the more history you have with your credit, the more the credit score will be accurate on the way that you use credit and reimburse credit," she adds.
This is why wielding a credit card responsibly is one of the easiest ways to improve your credit score.
What is a good credit score in Canada?
According to Iermieri, a good credit score can typically fall anywhere between the 700 to 800 range. So if you're in and around there, you're doing great.
"[Anything] higher than that is excellent," she says.
According to the standards set by Equifax, a credit score ranging from 660 to 724 is classified as 'good'. If an individual's credit score lies between 725 to 759, it is likely to be categorised as 'very good'.
Furthermore, a credit score of 760 or higher is generally considered to be of 'excellent' standing. It's important to note that the complete credit score range spans from 300 to 900, with higher scores indicating a superior credit rating.
It's also worth noting that credit scores in Canada are not fixed entities, they are dynamic and subject to change over time. In fact, credit scores undergo a reset every six to seven years. However, the precise timing of this reset can depend on several factors.
So, any negative data on your report, including late payments, accounts in collections, or bankruptcy declarations, will ultimately be removed. Notably, credit bureaus such as TransUnion and Equifax handle this process of deletion, without any action required from you.
What affects a credit score the most?
Iermieri says one of the biggest things is obviously how you use your credit, and if you pay all your bills on time.
"If you don't pay it on the due date, then we know that you have late fees. But you also tend to have a bad credit report after 30, 60 or 90 days. Any missed payments or late payments will be reported to the credit bureaus, so that can have an impact," Iermieri says.
It's also important to make sure you keep the charges on your credit card lower than your limit, or you could face repercussions.
"If your credit card is always maxed out, that will show and also have an effect on your credit score. So, it's always important to keep what is on your credit card lower than the limit," she says.
But don't go overboard and take on too many cards, because that can backfire as well.
"Sometimes we have a lot of opportunities of getting credit cards. They're offered to us, and it seems like a good thing. But, the more credit you have, the more that affects your credit score. Especially with credit cards, because you may not have a balance on them, but it's still considered to its limit, because at any time, you could go ahead and use that whole limit," she says.
"So, that whole limit is considered in your credit. So, having many cards, especially if you don't need them or use them, will negatively affect your credit score," she adds.
What things can hurt your credit score without you knowing it?
Iermieri says your debt-to-income ratio is a big one that people don't always consider.
"So, if you have a lot of debt that also affects your score negatively. Let's say you were to apply for a mortgage. Well, your mortgage advisor will consider all your credit card limits. And let's say you have $20,000 to 30,000 worth of credit card limits, well that will affect your debt ratio, and will have a negative impact not just on your credit score but also on your capability to go get a loan or mortgage," she says.
"And the more credit applications you do, that also affects your credit score. Because, let's say you apply for different loans of credit — you need like credit cards, a car loan or whenever there is a request for credit — that affects your credit score right away. Your credit score will diminish right away because it knows that you just went to ask for another loan or another credit limit," she adds.
How can I improve my credit score when it's really bad?
"A credit score is not static. It's not something that you look at today, and you say, well, this is a bad score, and I'm stuck with it — you can always improve it," Iermieri said.
But, improving one's credit score doesn't happen overnight. On average, individuals can anticipate a duration of approximately a year to witness noticeable improvements in their credit ratings. This estimated timeline primarily applies to those who consistently meet their financial obligations in a timely manner, which includes punctual repayments of credit card balances and loans.
"Pay your bills on time, reduce the amount of credit cards that you have, try to consolidate and get only one. Or sometimes we can ask for a line of credit or a personal loan to try to consolidate into one payment and one loan. So, on your credit bureau, instead of having 15 lenders, you only have one and if you pay it, that improves your score," she added.
Is it normal to be in debt in your 20s?
"I don't have the number but, obviously, credit is available easier right now, especially now that we buy online, we pay with credit a lot more than we use cash. It's just that habit, it may be accessible, I may be entitled to it, but that doesn't necessarily mean that I need it or I should use it, Iermieri explained.
According to the latest data provided by Statistics Canada, the average non-mortgage debt of a Canadian under the age of 35 in 2019 amounted to $19,600.
What are some credit card myths?
"Well, one of them is checking the credit score, because we know that it's something that we should do. Some people think that asking for a credit report will lower their credit score, which is not the case. You are allowed to see your credit report and you should keep an eye on it actually," Iermieri says.
It's worth adding that people also assume that getting a credit card when they have a bad score is a responsible move. But, it's actually doing more harm than good.
Maintaining an active credit account can be beneficial for your credit score. Engaging in a consistent cycle of charging purchases to your credit card and subsequently receiving a bill allows for a payment request to be generated.
Following this, making timely payments, or even settling the balance in full, contributes to the gradual construction of a stronger credit score. This consistent pattern of responsible credit use and payment can be an effective strategy for credit score improvement over time.
How do I check my credit score myself?
"There are two main companies that do that in Canada — it's TransUnion and Equifax, and you can ask to have a copy of your dashboard if you want to know your credit or your credit report," she added.
Other reliable companies to consider when obtaining accurate credit information include Borrowell and Credit Karma.
This article has been updated since it was originally published on Jul 22, 2021.
