What is “credit” or “credit score”, and why is it important to you?

Welcome to the first article at Firenze Financial Services. The purpose of the blog is to help educate and inform people about the multiple aspects of money, and how it affects your life. Having grown up in Vancouver, I find that our education system does very little when it comes to teaching us even the very basics of financial knowledge. We hope that through our articles, you’ll be able to learn new knowledge, and through that improve your financial health. Today, we’ll be discussing “credit”, and why credit is so important to Canadians all across the country.

What is credit? To put it simply, credit is a measure of how trustworthy you are. This obviously refers to neither your ability to keep promises, nor if you can be relied upon to help your friend move; It refers to how trustworthy you are in a financial sense. For example, someone with good credit will be seen more favourably by financial institutions, which can confer a variety of benefits.

Why is credit important? Credit is an important part of our lives for multiple reasons, but mainly because credit is linked so closely to our behaviours as a consumer. Something that most people know about is a credit card. If you have good credit, for example, you could qualify for credit cards which offer more benefits, such as cash back, or bonus points, or airline miles, etc. Another benefit of having good credit is that when it comes to purchasing a vehicle, you can qualify for loans and leases. One very big purchase that a lot of us seek to make in our lives is a home. With good credit, you could qualify for the best rates on mortgages.

The flip side is that with bad credit, you might only qualify for the credit cards with very low limit or very high interest rates. You may not be able to buy a car because you were declined for a car loan. You might not qualify for a good rate on your mortgage, or you might not be able to get a mortgage at all. Did you know that landlords also do credit checks on their prospective renters? If your credit isn’t good, you might encounter challenges when it comes to finding a new home. To put it simply, credit is something that effects a large part of our lives. This then leads us to our next question.

How is my credit score determined? Your credit score is affected by a wide variety of factors, and it would be difficult to cover all of them in one short article. However, here are some general trends which can contribute to your credit score, either negatively or positively.

1. Credit utilization: how much credit do you have, and how much of it are you using? If a person has a credit card with $5,000 limit, and each month they only put about $1,000 worth of spending on there, they have a relatively low credit utilization. This good for your credit score. If the same person regularly maxes out his credit card to the full $5,000, his credit will start to dip.

2. Late payments: This is an easy one. If you don’t make your credit card payments on time, you’ll see a dip on your credit score.

3. Credit length: How long have you had your accounts? If a person has used the same credit card for 10 years, it will be seen favourably. If a person has 3 credit cards and all were opened in the last year, it will be seen as a negative.

How can I raise my credit score? Armed with the knowledge above, think about your personal credit history. Have you made payments on time? Have you applied to a lot of credit cards? No one is perfect, and even if some of these apply to you, it’s not a problem. Here are some simple steps on preserving, and perhaps even improving your credit score.

1. Check your own credit, or talk to a professional, such as someone at it’s about you financial and they can help you through the process of credit checking. This way, you will actually be able to see your own full credit report and credit history. This will be useful in honing in on what needs to be improved.

2. Make sure all the information on your credit report is correct. Sometimes, wrong information may be present on your credit report, whether by a mistake by the credit reporting agency, or by the company submitting the information. In some cases, there may be a case of credit fraud.

3. Check to see if you have any late payments. If you do, it’s time to start asking yourself why you have these late payments, and what you can do to start making them on time. This is where a professional and come in and help you with your budgeting needs.

4. Close down extra, unnecessary credit cards or credit lines. No one needs to have 5 credit cards. Pick your top 2 or 3 cards, and look into cancelling the other ones.

5. Look into setting up an automatic payment schedule. Many banks offer this service in conjunction with your credit card company (sometimes they’re the same). When it comes time to pay your credit card bill, your bank can to transfer the money directly from your chequing or savings account to pay off the credit card, so you don’t have to worry about manually making the payment.

Credit is a critical part of Canada’s financial culture. By making sure that we have good credit, especially for the younger millennials, you will be able to have a safer, and more secure path when it comes to building your financial future. With good credit you could have an easier time getting that dream car. It could help you qualify for student loans for your graduate degree. It might even help you buy the dream home for you and your family.