When I moved to Canada in 2015 my family insisted that after getting my government IDs , that I open up a bank accounts ( checking and Credit card ) and start building credit. Building what? Because back in the Philippines credit score doesn’t exist and having a credit card can be considered as esoteric.
One of the immediate misconceptions that I noticed is that you should be spending to build credit which is absolutely false. You don’t have to spend unnecessarily just to prove to the bank that you’re using you’re credit card and be rewarded by bonus credit points, besides it’s not the bank that computes your credit score.
So why is it important to have a “good credit?”
Having a good credit would avail people with better interest for mortgage or car loans, and some employers and even apartments would now require credit checks to see how responsible you are with your finances. From the employer’s perspective, if you have a terrible credit score it also means that you are unreliable, so better try with a different company.
Knowing someone’s credit score may not be a bad idea before considering a romantic relationship with that person. I met someone working for a bank and she’s with someone who had a terrible credit score when they first met, which she’s not aware of. Long story short, because of the guys terrible credit score it prevents them from mortgaging the house that they want and it limits the jobs that the guys can apply for until he fixed his credit score. After some time fixing the guys credit score, they are in the house that they wanted and living happily ever after.
WARNING! Not all stories have happy ending, credit score can affect your life in ways you never imagined. Be cautious.
Here are the five pillars of your credit score and their corresponding percentage on how much it affects your rating;
- PAYMENT HISTORY 35% 315/900
“Your credit history includes information about how you have repaid the credit .” Now here’s a tricky part, paying your credit on time and in full is good for your credit score, however, the financial institution a.k.a the bank is not making money out of you if you’re always paying on time and in full, that’s why they may not be thrilled to increase your credit limit. And if you ask for it, they will do a hard inquiry that will negatively affect your score and not a guarantee of anything.
- CREDIT UTILIZATION 30% 270/900
This is also known as the 30/30 rule. You should only use 30% of the limit per credit account. Let say you have 3 credit cards and two of those cards have $2,500 limit and one with $5,000 limit. Tho your total credit limit is $10,000, you technically can use 30% of that limit which is $3,000. However, it should be spread out in proportion to all your three cards to avoid a negative impact on your score. If you must spend $3,000, your should split it $750,$750, and $1,500 respectively. Or just pay the debt immediately.
- CREDIT HISTORY 15% 135/900
“This section of your credit file details how long your credit accounts have been in existence. The credit score calculation typically includes both how long your oldest and most recent accounts have been open.” So let’s say you had your first card five years ago and considering to open a new credit card, Your first card is five years old and the new one will be 0 years and your history will be divided in to two, that makes your credit history 2.5 years old.
- PUBLIC RECORDS 10% 90/900
“Those who have a prior history of bankruptcy, or have had collection issues or other derogatory public records may be considered risky. The presence of these events may have a significant negative impact on a credit score.“
“Bankruptcy stays on your Equifax credit report for 6 years after the discharge date, or 7 years after the date filed without a discharge date. If a second bankruptcy is filed, then the first re-appears on your Equifax credit report, and both bankruptcies remain for 14 years after the discharge dates. “
- INQUIRIES 10% 90/900
Anytime an individual’s credit file is accessed for any reason, the request for information is logged on the file as an inquiry. Inquiries require the consent of the individual and some may affect the individual’s credit score calculation. The only inquiries which may impact a credit score are those related to active credit seeking (such as applying for a new loan or credit card). These inquiries are known in industry jargon as “hard pulls” or “hard hits” on your credit file. The hard inquiry may be the leading indicator, the first sign of financial distress that appears on the credit file. Of course not every inquiry is a sign of financial difficulty, and only a number of recent inquiries, in combination with other warning signals on the credit file should lead to a significant decline in a credit score. Your credit score does not take into account requests a creditor has made for your credit file or credit score in order to make a pre-approved credit offer, or to review your account with them, nor does it take into account your own request for a copy of your credit history. These are some examples of “soft inquiries” or “soft pulls” of your credit.
If you want to know your credit score without negatively affecting it, I suggest CreditKarma. DISCLAIMER: I’m not affiliated to any of the companies, but would welcome endorsement opportunities 🙂