So what is your credit score and why does it matter? Just ask Robyn Lalani whose poor credit score hit her hard in the pocket book.
Ms. Lalani bought her first condo in Vancouver for $249,000, borrowing $200,000. At the time she says she had a poor credit score, between 620 and 639, and the lowest interest rate she could obtain on a 30-year fixed mortgage for a five-year term was 5.34 per cent. Her monthly payment was $1,116. With a better credit rating, between 760 and 850, she says she would have been able to obtain an interest rate of 3.75 per cent. That would have dropped her monthly payments to $927. With a healthier credit score she would have saved more than $200 a month or $2,400 a year – significant savings over the life of her loan. Ms. Lalani has since improved her score and used it to her advantage in the purchase of her first house.
If a lending institution perceives that you are a credit risk, then your borrowing terms and conditions will be more onerous, and that could cost you thousands of dollars over the life of a loan, according to Tom Reid, director of consumer relations for TransUnion.ca. Mr. Reid says a credit score of 750 or greater is good. In order to reach or maintain a healthy score we have to do three things: limit delinquency of payment, limit utilization of credit, and maintain a healthy mix of credit. Considering the largest portion of our credit score is made up of our payment history and the simple exercise of paying your bills on time, a simple solution is to set up automatic bill payments.
Ramit Sethi, author of I Will Teach You To Be Rich shares a simple strategy for putting your bill-paying system on autopilot. Any bills you can’t pay automatically will likely have a feature that will alert you when your bill is ready to be paid.
Debt-to-credit ratio is the second most important consideration when it comes to credit. Ideally we should be using less than 40 per cent of our available credit, says Mr. Reid. If you have an open credit card that you no longer use, you don’t need to close it, especially if it doesn’t have an annual fee. Considering “a major determining factor in your score is your percentage of available credit, you want to have the highest level of available credit, while using as little of it as possible. If you have a card you no longer use, keeping it open will actual lower your credit utilization rate,” says Andrew Schrage of the personal finance blog MoneyCrashers.com. Having a lower debt-to-credit ratio equals a higher overall score. The other option before you close an account is to secure an increase on available credit on the cards you are keeping open. Paying off debt should therefore be a priority, and so should having a healthy mix of credit in your name: credit card bills, utility bills, car loans, and so on.
If you’ve checked your score with either TransUnion or Equifax and you’re sitting with a score of 800 points or higher, with a low debt load, then you won’t have difficulty getting access to loans at the lowest rates and terms available. If you have a score less than 600, considered to be poor, then following the three suggestions above will help to increase your credit number over time.
Our credit score affects us in a variety of ways these days that we may not be aware of. It affects mortgage rates, insurance rates, and can even affect our ability to get a job, according to Mr. Schrage.
“Wherever your score currently stands, you should identify ways to improve it in your daily life. By combining money-saving strategies with more credit score-friendly practices, you can immensely improve your credit score standing.”