Are you keeping score? If not, you’re already losing…
When it comes to having a good credit score, this is one game you don’t want to lose. I was fortunate to learn the value of a credit score and set the foundation for the future of my life. These are a few things I’ve learned over the years that have helped me do so and bring my score up to Excellent standing. If I can do it, so can you! But first, let’s answer the main thing that’s on your mind…
What is a credit score? And why should I care?
With the help of our friends at the Government of Canada – “Your credit score is a three-digit number that comes from the information in your credit report. It shows how well you manage credit and how risky it would be for a lender to lend you money.”
The standing of your score can usually fall into a few different categories, here is an example from Credit Karma:
| A credit score of… | Means… |
| 800-900 | Excellent credit |
| 720-799 | Very good credit |
| 650-719 | Good credit |
| 600-649 | Fair credit |
| 300-599 | Your credit needs some work |
The reason why you should care is that this is how banks and governments will rate your level of “trust” when it comes to loaning you money. The higher your score, the more comfortable they’ll be to loan you money because they can trust you will pay it back.
If you’re thinking “well, I don’t need a loan, why should I care?” Well, just wait until it’s time for you to buy a car or a house, you’ll definitely realize how desperate you are for these companies to trust you, seems a little more valuable now, right?
How do I find out what my score is?
Now that we know the importance of a credit score, how do you know if you have one? And if you do, how high is it?
First, a few questions to ask yourself:
- Do I already have a credit card?
- Do I already pay bills for a phone, cable, or internet?
- Have I had a student loan, or have one right now?
If you’ve answered yes to any of these, then you probably already have a credit score. If not, then you’re getting a head start!
In recent years, it’s become very easy to check your credit score. A few sites like Credit Karma and TransUnion exist today that allow you to easily check your score after answering a few questions to verify your identity. (I personally use Credit Karma and have found them to be very easy to use.) Some banks have also begun to offer this service through their online banking portal or mobile banking app.
Hopefully, after checking out one of these options, you’ve found that you have a Very Good score or better. If you’re sitting a little lower than that, don’t be worried! There are a few things you can do to give it the boost it needs.
How can I improve my score?
There are 3 (hopefully easy) rules I’ve learned that have helped me improve my score over time:
- Pay the minimum amount on your credit card statement
- Pay it on time (ahead of time is even better)
- Use as little of your credit limit as possible (Try to not use more than 50% of your credit limit)
Rules #1 and #2
Rule #1 and #2 are the most straightforward, because they are based on information already available to you. Find your credit card statement, or visit the details of your credit card account on your online or mobile banking, and you will find the minimum amount due, and the due date (or date to pay by).
Not following both of these rules can and most likely will result in your score decreasing. It takes much more time to increase your score, so you definitely want to avoid having it go down by any means necessary.
There is no grey area when it comes to these two, so you should have zero excuses about not knowing what to do. (This applies to loans too, so be sure to build the same habits with your student debt.)
Rule #3
Rule #3 is a little more flexible (I’ll explain in a minute). Your credit limit is also found on your credit card statement or banking details. This is commonly known as your “credit utilization”, which is the percentage of your total available credit being used. In essence, you shouldn’t be using all of the credit available to you (if your limit is $10,000, don’t let your balance ever hit $10,000). Just like rules 1 and 2, having a high credit utilization will decrease your credit score (i.e. using 100% of your $10,000 credit is BAD). Keeping this lower will help increase your credit score. There’s no specific utilization you should target, just know that lower is better.
You should make a habit of setting your own limit, one that is lower than your total credit limit. For example, if your credit cards are heavily used, try setting a limit for yourself of 50% of the total, (if we calculate 50% of your $10,000 limit, your balance should only be going as high as $5000), and try to lower this to 40% after a few weeks. Then maybe 25%, and so on.
The bottom line – the less credit that you regularly use, the better it looks for your credit score, because you can prove that you are not reliant on credit to survive.
We’re not all in the same boat
Now, the reason why I consider Rule #3 to be more flexible is because it is subjective to each person, depending on your financial situation. For some of us, following all three of these rules is possible. But for others, not so much, especially when there are times that we do in fact need to rely on our credit cards to cover costs when cash is not available.
Only you, or with the help of an advisor, will understand your financial situation best. So if you don’t think you can keep your balance under that 80% mark for this month, that’s okay, strive towards that goal. Of course, if you think you’re in a bind, don’t hesitate to reach out to a friend or family member you trust for advice.
Even an advisor at your bank if you’re comfortable – I know some people are hesitant when it comes to seeking their bank for help, but I think it’s worth noting that from the advisors I know and have met, they are open and willing to help you out. It’s an option to consider as a source of free advice.
Do what you need to do to keep your head above water, but if you’re able to start with rule #1 and #2, then #3 will come easier over time.