/ Finance 101

7 facts you didn’t know about your credit

Credit and credit scores are things that a lot of people don’t understand.

There seems to be a lot of competing information out there, which can make it difficult when you want to learn more about your own credit.


To make it easier for you, we’ve broken down a few facts about credit and credit scores:


1. More credit is not always a bad thing.


Have you heard people tell you not to take out too much credit, as it will hurt your credit score? That’s not necessarily true. Your credit score looks at how much credit is available to you vs. how much you currently owe, or are using. So, sometimes having a higher credit limit is actually a positive on your credit score.


Consider this: if you have a $2,000 limit, and owe $1,800, you owe 90% of what is available to you. But if you owe $1,800 on a $10,000 limit, you only owe 18% of what is available to you.


2. Not having any credit cards doesn’t mean you have a good credit score.


A lot of young people find themselves in this situation, particularly when trying to purchase a house and get a mortgage. They have no debts and no credit cards or loans, so they assume that they must have good credit. But your credit score is largely made up of past financial behaviour, like whether you paid your bills on time or how much of your available credit you use. If you’ve never had a credit card or other debt, you don’t have any financial history for them to look at. Without that information, creditors have no idea if and when you will pay them back, which may impact your ability to get a loan when you do need it.


3. Having more assets will not help your credit score.


It turns out that the balance of your savings account has no bearing on your credit score. That’s not to say that assets can’t help you when it comes to borrowing – for example, if you own your home, you may be able to access lower rates through home equity or secured loan products – but they will not help improve your actual credit score.


4. It’s not only credit card companies reporting to the credit bureau.


Many people are surprised to hear that it’s not just the banks and credit card companies who report missed or late payments to the credit bureau. Apartment or rental companies, utilities, cable companies and even cell phone companies can also report missed or late payments, which will hurt your credit score. If you’re unsure whether or not a company reports payment information to the credit bureau, you can always ask.


5. Co-signing for a loan will impact your credit score.


Many people believe that co-signing for a loan won’t impact their credit score, as the loan is not in their name. But the very nature of co-signing means that you are in fact held legally responsible if the co-signor defaults on payments. The loans you co-sign on will appear on your credit report, and any missed payments will negatively impact your credit, so make sure you are aware of those risks before co-signing for anyone.


6. Checking your score doesn’t hurt your credit.


Many people have no idea of what their credit score is because they are too afraid that looking will hurt their score. The truth is that personal inquiries are different from other credit checks. When a company checks your credit in order to sell you a credit product, like a credit card, an auto loan,  mortgage, etc., this is considered a “hard enquiry”, and leaves a record. When an individual checks their own score it is considered a “soft enquiry”, which has no impact on your score. You are free to check your own score as often as you like without worrying about impacting your credit.

 

7. You can always improve your credit score.


Trying to improve your credit score may seem like a daunting task, but it can be done. Small changes, like paying bills by their due date, can make a big difference over time. And because everything is reported to the bureau each month, a few months of good credit behavior can really start to improve things. If you have a low credit score, fear not: it can always be improved.

 

At the end of the day, the best way to have a strong credit score is to do your homework: understand what debts you have, when they are due, and what the penalties are if they aren’t paid. Be realistic with yourself about how much credit you need and will use, and what you can and can’t pay off without incurring too much financial stress. But remember, even if your score has gone down, it can always be brought back up with positive financial behaviour.