Your credit score—only three digits long, but those three digits have a significant impact on how the rest of the world looks at you. They can dictate your eligibility for loans and other credit, the accommodations you can rent, and it can even affect your employment opportunities.
This article is the first in a 5-part series of posts that will take you through everything you need to know about your credit score, including who looks at it, how the score is calculated, and how you can fix your credit if it is damaged for any reason.
Credit Rebuilding Series:
Part 1 – What is Your Credit Score and Why is it so Important?
Part 2 – How Is Your Credit Score Calculated?
Part 4 – Rebuilding Your Credit
Part 5 – Fine-tuning and Monitoring
Before we get started, let’s be clear about a couple of points. First, credit rebuilding is your responsibility alone—no one else can do it for you, and you can’t ‘buy’ a better credit score. There are no magic bullets. Although the work of credit rebuilding is not that difficult to do, there is some detail involved, and it can be a bit of a grind. It’s going to take time, patience and perseverance on your part!
You are likely here because you filed a consumer proposal or bankruptcy or have had credit issues in the past and now have a damaged score. You want to know where to start and what to do—this guide will do that. First, let’s start with some basics: why is your credit score important, who uses it, and how is it calculated. Once you have a solid understanding of these basics, we’ll give you a process and concrete action steps to repair and rebuild your credit.
Why is Your Credit Score Important and Who Uses It?
Your credit score is an underappreciated aspect of your financial health. Lenders and other financial institutions use your credit score to decide if you qualify for various credit products or services. Also, here are some different situations where people or companies may use your credit score:
Landlords may check your credit before allowing you to rent from them.
Potential employers may conduct a credit check before offering you a job.
Utility and phone companies may also require a credit check. They might still provide service to you, but if your score is low, they may require a security deposit from you.
Insurance companies can use a credit check to determine the risk they may be carrying with you.
These people are all looking to understand how likely you are to pay your bills on time or what level of risk you represent to them. So your credit score is a fundamental piece of information about your financial health!
What Exactly Is Your Credit Score?
Your credit score is simply a number between 300 and 900 created by the two credit reporting agencies in Canada, Equifax and TransUnion. The lenders report your use of credit to the bureaus, which in turn run this information through a series of formulas to determine how likely you are to pay a lender back regularly and on-time.
What do these ranges mean? If your score is Poor or Fair, your ability to acquire new credit will be very restricted, and you’ll pay a higher interest rate. Mortgage applications will automatically be denied. Loans for automobiles will be at sub-prime rates, meaning you may pay more than 25% interest, and your lender might install a device so you can’t start the vehicle if you miss a payment!
Your score needs to be a minimum of 650 to begin enjoying standard credit, such as access to mortgages and regular interest rate loans. Until your score is higher, you may pay slightly higher interest rates.
Once you get into the Very Good and Excellent ranges, your access to new credit will be easier, and you will have access to the best interest rates for all financial products. You can only achieve higher scores by consistently making payments on time and making other responsible decisions about credit use. Your credit score takes time to build—there are no quick fixes!
The Credit Rating Scale
At the heart of the scoring system is a 10-point rating scale that the credit bureaus use to assess various credit events.
R0 – Too new to rate. Approved, but not yet used
R1 – Perfect rating
R2 – Payment late by 30 days
R3 – Payment late by 60 days
R4 – Payment late by 90 days
R5 – Payment late by 120 days or more
R6 – Not used by the bureaus
R7 – You are making a consolidated debt payment, either to a consumer proposal or in a credit counselling plan
R8 – A house, vehicle or other possessions have been repossessed and sold to clear your debts
R9 – You have filed for bankruptcy, and your debts are uncollectable
This scale makes one thing abundantly clear: ANYTHING other than consistently making your payments on time to your lenders, month after month, will negatively affect your credit score. The damage from missing payments can be very severe—you can lose as much as 100 points from missing a payment! Generally, the lower your credit score already is, the lower the impact will be from additional missed payments. However, by then, your score has likely already been badly damaged.
Now that you understand better who looks at your score and what it is, next week, we’ll explain the basis for the calculations that establish your score. With this general understanding, the recommendations we make for repairing and rebuilding your credit will make more sense.