One of the most empowering developments in personal finance in the past 10 years is easy access to credit scores.
Seeing your credit score gives you an idea of how lenders, landlords, insurance companies and even prospective employers view you as a borrower and manager of your own affairs. But credit scores also confuse the heck out of people.
They worry about small dips in their credit score, and they agonize over whether to cancel a credit card they don’t want or use because it could affect their score. They may also overestimate how much the credit scores they see influence their applications for mortgages, loans and credit cards.
All of this results from a fixation on credit scores that creates unnecessary worry and may prevent people from making sound decisions about their finances.
The number of questions from readers about credit scores has been edging up lately, particularly in connection to credit cards. There’s a theme here of credit scores being seen as fragile and in need of constant care and monitoring. Ironically, it’s mostly people with good scores who reach out the most.
A quick credit score primer: The best score is 900 – it’s both rare and far in excess of what you need to borrow efficiently. “If somebody sees their credit score and it’s more than 760, they don’t need to worry about anything,” said Julie Kuzmic, Equifax Canada’s senior compliance officer for consumer advocacy.
Ms. Kuzmic used the example of two people who apply for the same credit card, one with a credit score of 780 and the other at 880. “From a credit score perspective alone, these two people are seen as identical.”
Credit scores can be viewed at no cost through accounts at many banks and credit card issuers, and through companies such as Credit Karma and Borrowell that connect you with financial products such as credit cards and loans. You can also go directly to Equifax.
If you promptly and consistently pay what you owe, take a look at your credit score and then let it be. It’s tempting to check regularly, but unnecessary and distracting. Dips up and down are common and of no interest to lenders as long as you’re at or above 750 to 760.
Another reason to lay off your credit score once you’ve checked it out is that it may differ from the scores considered by lenders. There are multiple players in credit scoring that each offer different kinds of scores. The score you’re able to see in your banking website or app is just a snapshot – not a definitive portrait of your credit score.
One of the lessons people have learned well about credit scores is the value you get from having longstanding credit accounts you’ve managed well. Cancel one of these cards and you might see your credit score drop mildly – and inconsequentially – because it brings down the average age of all your cards together.
It’s a different story if you cancel a card and you’re either new to borrowing or you recently arrived in Canada. Here, we get into one of the underlying intricacies of credit scores.
As Ms. Kuzmic explains it, the scoring system generally categorizes people into multiple groups, based on their credit history. If you’re in a statistically higher risk group, possibly because you don’t yet have a long history of borrowing or because you recently declared bankruptcy, then closing a card can have a bigger impact on your score.
A reader asked recently about whether lowering his credit limit would affect his credit score. Ms. Kuzmic said that lowering your limit while still spending the same amount on a card increases your utilization, or the percentage of your borrowing room being used. While that can in theory be a negative, someone who has a long, solid credit history typically wouldn’t notice a drop in their credit score.
One more example of needless worry about credit scores affects people who pay what they owe before their monthly statement is issued and thus may show a zero balance. The concern is that this card may be seen as inactive and thus won’t help build your credit score. Ms. Kuzmic said this isn’t true. “You’re fine,” she said. “You have an active card.”
Finally, credit scores are not the last word on your status as a borrower. Ms. Kuzmic said employment status and income might be considered and, in some cases, your bank account balances and wealth holdings as well.
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Rob Carrick