As we have already seen, credit is a tool that you must know how to use and that you will certainly need to succeed in realizing your important projects. On the other hand, if you want to have the opportunity to benefit from an interesting credit rate while not having too much difficulty to build your credit report, you must absolutely watch your credit rating which will be used by the lenders for judge your quality of borrower. To help you make the best choices and implement the best strategy, we will explain in detail how the credit rating works. You will be able to maintain the level of your credit rating,
How does the credit score work?
The credit rating is a three-digit number that assesses your borrower quality and is built into your credit file. The credit score will be used systematically by the lenders to determine if they will give you the credit you asked for and especially what rate they offer. However, your credit file and the personal information it contains are protected and are not accessible without your permission.
The credit rating is determined by credit reporting agencies, it is private companies that collect information about your use of credit, to provide an objective assessment of your credit usage. To function, these companies sell the credit files they have created to their customers, banks, credit companies, financial institutions … There are two major credit reporting agencies in Canada.
How to interpret your credit rating?
The credit rating is calculated using a mathematical formula that takes into account the information in your credit file. Thus a reasonable use of credit allows you to increase your credit rating, while irresponsible use will be penalized by the decline in your credit rating. In Canada, the credit score is a number between 300 for the worst rating and 900 for the highest rating. The objective is to obtain and maintain the best possible rating, since you must know that a low rating leads to a rise in rates and may even cause a refusal in some organizations.
To analyze your credit rating, you must first start by asking for your credit report. To have access to your entire credit file, in order to consult your credit rating, you will have to apply online, but this service is not free, since you will have fees to pay.
The two methods of calculation used to calculate your credit rating are the Fico method or the Beacon Score, it can determine a rating to assess your borrower quality:
- A score between 700 and 850 corresponds to a very good evaluation.
- A score between 680 and 699 corresponds to a good evaluation (the American average is, for example, 682).
- A score between 620 and 679 is a fairly average rating, but remains correct.
- A score between 580 and 619 is a low rating.
- A score between 500 and 579 is a rather low rating.
- A score between 300 and 499 is a rather bad rating
How is my credit rating evaluated?
Both methods, the Fico method or the Beacon Score work the same way, since the objective is to take into account all the information that can assess your borrower quality. To do this, the formula includes the information that appears on your credit report, the credit limit used, current balances, your debt ratio, the history of your payments, any late payments, the number of accounts open, if one of your accounts has been entrusted to a collection agency, if you have gone bankrupt personally and all the other information that can help characterize the use you make of the credit.
The analysis companies will therefore especially analyze:
- The history of your payments.
- Your debt level.
- The age of your credit history to verify that it is really significant.
- Your different credit requests.
- The types of credit you use.
What is the right attitude to adopt to increase your credit rating?
A good credit rating is built over time, so it is particularly important to behave responsibly towards credit by making a point of honor to respect certain rules.
- Always pay your bills as quickly as possible, because even though most companies will accept minor late payments, they are detrimental to your credit rating.
- Try to pay the balance of your credit card every month. People usually use their credit card to pay current expenses and basic needs. But by successfully clearing your outstanding monthly, you simply prove that you do not live beyond your means.
- Borrow only the amount of money you really need while respecting the limits of your debt ratio, but also the limits of your ability to repay.
- Always pay off your debts as quickly as possible, so you can increase your credit rating, but also make great savings by reducing interest.
What are the mistakes that lower the credit score
Of course, late payments, or worse, defaults will inevitably drop your credit rating. Yet these are not the only mistakes to avoid if you want to maintain a correct credit score.
First of all, be aware that even late payments that do not pertain to your credit records can be taken into account and influence your credit rating. Thus a simple delay for the payment of a contravention can have a negative impact on your assessment. Then, if you use a checkbook, you have to pay special attention to your accounts because a bad check can have a disastrous effect on your credit rating and credit report. Finally, you must avoid asking for successive increases in your credit reserve. Multiplying your credit limit requests gives you an image of a bad manager, which will negatively impact your credit report and credit rating.
How to raise my credit rating?
If you have been through a difficult financial situation, you may discover that your credit rating is quite low and may prevent you from completing your projects. However, all is not lost, because it is possible to catch up and raise your credit rating.
- Check the recorded information: It is important that you check the information that has lowered your credit rating and that you dispute any errors that may have been made.
- Limit purchases made by credit card as much as possible: to increase your credit rating, you must avoid making credit card purchases in order to increase the ratio between the credit used and the credit available.
- Do not make a new payment request: as long as your credit rating is not raised, it is imperative that you avoid applying for credit.
- Do not close your credit accounts: in a difficult situation with a low credit rating, you might be tempted to close your credit accounts. However, remember that your seniority of your accounts plays an important role in calculating your credit rating, so it is better that you keep your account open.
- Pay your debts: to raise your credit rating, it is very important that you manage to settle all of your debts.
- Do not be afraid to ask for help and be patient: to get your credit rating back up, you can ask for help from financial advisors who will help you make the right decisions. However, you will have to be patient because your credit rating will not go back overnight. But by making the right decisions and implementing the right strategy, you’ll be able to raise your credit rating.