Prior to a week ago, I had never checked my credit score. In fact, I never felt the need to because I always assumed it was close to perfect, simply based on the fact that I paid my cell phone and credit card bills in full, and on time, and have perhaps only incurred interest charges on late payments maybe twice or three times in my 13 year history of owning a credit card.
I had to check my credit score recently, as I was on the hunt for a new apartment — so it came as somewhat of a surprise to me that my credit score, was in fact, nowhere close to perfect. On a scale of 0 to 900, mine was 736, falling somewhere between “good” and “very good”. How could a couple of mess-ups in not paying my credit card bill on time alter my credit score so dramatically?
Turns out, what determines one’s credit score is not just payment history, but how much you owe, the length of your credit history, the frequency of which you’ve applied for new credit cards or lines of credit, and the types of credit you use. In my case, I had started using my credit card much more frequently, often maxing it out monthly just to gain the most out of its cash-back rewards scheme. Even though I always paid my bill on time, the fact that I was accessing more credit than I used to, worked against me.
“It’s kind of counter-intuitive,” Toronto-based personal finance expert Barry Choi told VICE Free. “Let’s say you have a $1000 credit limit on all your cards, and you utilize all your credit all the time. Even though you’re good at paying your bill on time, your utilization rate is almost 100 percent. In contrast, if you have a $5000 limit, and you used $1000 all the time, your utilization rate drops to 20 percent, improving your credit score,” Choi explained.
Essentially, it’s not a bad thing to increase your credit limit if you have the opportunity to do so — just don’t get stuck in the trap of maxing out your credit, and not having the ability to pay it back.
On the flip side of things, owning multiple credit cards, and having access to lines of credit doesn’t exactly help your credit score. The idea here is that the more borrowed money you use, the less “good” you are at managing your finances, pushing your credit score down a couple of notches.
The other extreme of that is not having a credit card at all — that also lowers your credit score. “New immigrants who are from countries that tend to use cash, and perhaps have never owned a credit card, will struggle with their credit score in Canada because they don’t have a credit history,” Choi said. “In a scenario like that, your options of credit cards are vastly limited, and the interest rates on these cards are slightly higher than normal.” For credit card companies, they need proof that a person has the ability to pay back debt on time — that proof is only obvious if a person has a history of borrowing.
A good friend of mine, Sara (not her real name), allowed me to share this story of hers: she owns two credit cards, and has cell phone and internet bills to pay every month. Sara works five days a week, but at a job earning just above the minimum wage — rent takes up more than 50 percent of her salary, and the rest goes to just living. Sara admits that she struggles to pay her bills on time — the best she can do is meet her minimum bill payments every month. The interest on one of her credit cards has added $700 to her bill, an expense that very frankly, Sara just cannot afford. But Sara’s credit score isn’t bad by any measure — in fact, it’s 685, not too far away from mine.
“The funny thing is people don’t realize that technically speaking, if you make your minimum payment every month your credit score will actually be fine. If you miss one payment, the credit bureau will see it as perhaps a mistake, but if you miss two payments in a row, your account will be flagged internally,” said Choi.
Of course, credit scores can vastly vary, according to whom you get your score from. Credit Karma, an American personal finance company that has a very user-friendly app aggregates data from TransUnion, and lets you access your credit score in just a few steps. That number might be different from getting your credit score directly from a different company like Equifax or Experian. These three companies, the biggest credit bureaus in North America, have their own data, own scoring products and algorithms that determine your credit score. For instance, they might value “credit utilization” more than “credit history”. Moreover, some credit card companies have relationships with certain credit bureaus and not others, so a missed credit card payment may be reported to TransUnion, and not Equifax.
So, given all these factors, what are the best ways to improve your credit score? The Financial Consumer Agency of Canada has a few tips:
- Always make your payments on time, even if it is just the minimum. And contact the company you owe if you can’t make your payment on time, because that might prevent them from reporting a missed payment to a credit bureau.
- Don’t go over your credit limit, and try to use just 35 percent of it — if that means calling your credit card company to ask for a credit limit increase, then do that.
- The longer you have a credit account open and in use, the better your score will be.
- This is obvious, but try to not make it seem like you’re living beyond your means — limit your credit checks and urgent requests for loans.
- Use different types of credit, instead of just relying on your credit card. So if you have a line of credit, use that sometimes (it probably has a lower interest rate too!).
Given all that, achieving a perfect credit score is actually close to impossible, according to Choi. “No one has a 900 credit score. If your range is 720 to 760, that’s pretty excellent.”