When you set up your journey towards singleness, it’s essential to consider your financial health. Just as explained in How To Maximize Your Singleness, you must take care of your finances. That’s why I created a blog post series called Increase My Credit Score because credit scores are essential.
I would often share my credit score on social media, and many of my followers would ask me how I managed to increase it. My intentions weren’t to show off but to show how it’s possible to obtain a credit score above 800. That’s when I decided to help my readers with their credit score through my journey.
To start the series, we must understand the basics of credit scores. In this first post, I share what I know about credit scores along with my journey. There’s just a lot to learn about credit scores, so I will try to be as detailed as possible. Therefore, here’s everything you must understand about credit scores.
What’s a credit score?
To start, a credit score in Emmerance’s definition is the three numbers that determine how trustworthy you are. There are different credit score ranges,
- Poor: 300-579,
- Fair: 580-669,
- Good: 670-739,
- Very good: 740-799,
- Excellent: 800-850.
In Canada, there are two credit reporting agencies, Equifax and TransUnion. Both credit reporting agencies evaluate your credit score differently; that’s why your credit report might have a slight difference. This is why it’s important to verify with both agencies to know your overall credit score.
Why are credit scores important?
As mentioned above, those three numbers determine if you’re trustworthy. It answers a lot of questions to lenders, banks, or landlords and many more. For example, your employer might ask for your credit score to hire you (I’ve been there many times).
To these lenders, when they look at your credit score, the main reason why they would verify it would be to determine the likelihood that you will pay your bills as agreed.
Credit scores are important and should be important to you because it determines a lot of things. You can obtain a lower interest rate with a good credit score. You can have the apartment that you want if the landlords decide to check your credit score. And you can get better employment. Therefore, keep this in mind, you will have to create habits to maintain a good and hopefully excellent credit score.
How credit scores affected me
Back in 2016, I was visiting a car dealership with my dad. He wanted to get a van and found one for a reasonable price. When we visited, the two sales agents sat down with us and unknowingly, I accepted that they pull out my credit score.
I had no idea what I was doing back then, but thankfully I listened. My credit score was around 660, which is a fair credit score. The sales agents were both surprised because of my age and how I handled my credit card.
They started talking to me about my credit score and how it will work with the car’s interest rate. While looking at my credit score, they looked at three things.
The first one was the credit utilization, which was terrible. I would say that it was over 70%.
The second thing they looked at was my debts, or I’d say the other credit I used or credit mix. I only had a credit card with a small limit, I can’t remember what it was, but I’m sure that it was less than $2,000. And I had my student loans, which was about $15,000. I was still in university, so I wasn’t paying it off yet.
The third one was if I had any missed payments, which was good because I always paid my minimum payments.
As I sat there and listened, they were very proud of me, and I was too, even though I didn’t know what was going on. In 2016, I was 20 years old and still didn’t know anything about money.
My dad looked at their offer and declined because the car wasn’t what he wanted, so we went to another dealership. The other one looked at my credit score, loved what he saw and gave us the van that my dad saw online.
How I improved my credit scored from Fair to Excellent
Around that time, I was working for a credit card company. It was a call centre, and people would call to activate their credit card, complain or cry because they missed their payments.
We would advise on how to pay their credit card on time, investigate the fraudulent activity, and try to calm them down. It’s very different when you’re backstage. You look at all of these crazy credit limits and credit utilization.
While working at that credit card company, I started telling myself things that I should never do and what I should do. The first thing was to never cry on the phone over my credit card, so I paid my minimum payment every time.
These habits that I implemented came in handy over time. I didn’t realize what I was doing, but I started looking and taking care of my credit card.
Credit scores can backfire if you don’t take it seriously.
While starting this three days series, I want you to know one crucial thing. A credit score can backfire if you don’t take it seriously. One thing I noticed about credit scores is, they change every month.
However, just like grades in school, one lousy note can decrease your good grade. That’s why you should look for the best way to maintain your credit score in the Very good or Excellent bracket.
You should follow the rules and get in debt if you can pay it off quickly, not after a month but after a few weeks.
How credit score works
Before giving you tips on how to increase your score, I believe that you should know how it works. Let’s look at the user manual together. These following instructions were written with the help of Equifax and TransUnion blog posts.
A credit score contains all your credit history. It starts from the moment you received your first loan or credit.
The two credit reporting agencies evaluate your credit score every month. When they calculate your credit score, they look at multiple factors: credit history, the amount you owe, and credit utilization.
Credit history
There’s a whole sub-section for the credit history. It’s the most significant part that affects your credit scores.
Bankruptcy and Collection
Under the credit history, they look at your public records and collection. If you ever went bankrupt or a loan was sent to collection, it will drastically affect your credit score. I would advise staying away from getting bankrupt or in the collection. I have never been there, that’s why I can’t tell you how to recover from it. However, if you ever had, I highly suggest finding a way to get everything in order as fast as possible.
Late and missed payments
We also find the late and missed payments under credit history. Having a late or missed payment can affect your score drastically too. They look at how late you were on your payments and the amount.
Delinquent account ratio
How many of your credit accounts are delinquent to all of your accounts on file. The credit reporting agencies have a ratio they look at, and you don’t want to have too many or any delinquent accounts. However, if you do, try your best to figure out how to get out of it as quickly as possible.
Number of inquiries
The number of inquiries that are into your credit file is taken into consideration also. They look at it this way; when you ask for a loan, it means that you’re in distress. Even though people that ask for credit aren’t going through a hard time with money, they will still consider this action as is.
However, it’s not all inquiries that are bad. You have to understand the difference between hard hits and soft hits. Hard hits are when you sign up for a credit card, buying a car or getting a mortgage. It’s when the bank or the agents have to ask for your credit score to approve the credit.
A soft hit happens when you’re getting offered credit. It doesn’t affect your credit score and won’t show a credit inquiry in your credit report. An example of this would be when your credit card company wants to provide an increase of your credit limit, and they verify your credit score without telling you. So you get pre-approved for the increased credit limit, but if you ask for an increase, it will affect your credit score (hard hit).
Please note that some credit card companies would do a soft hit on your credit score when you ask from a credit limit increase. However, I’m unsure how you can figure this out. Therefore, I suggest that you wait until you get pre-approved.
Credit utilization
One important thing to consider is your credit utilization. When you have good or excellent credit, this is the number one factor that makes your credit score dance while you’re trying to maintain it.
Credit utilization is the amount that you owe versus the credit limit. This only works with credit cards and lines of credit. The credit agency looks at your overall credit limit and looks at the percentage you’re using.
Some credit score agencies say that it shouldn’t pass 35%, some say 30%. I say try to keep it as low as possible, but 30% is the right percentage. For example, suppose you have three credit cards with the overall credit limit of $6,000. In that case, your overall balance shouldn’t be higher than $1,800.
To better understand how the credit reporting agencies calculate your credit scores, I highly recommend reading this post from Equifax.
To finish, remember that your credit score is the number that will determine if the lenders can trust you. Therefore, be wise with your credit utilization.
I believe that as an individual, you are responsible for your financial literacy. This post was just to help you understand credit scores. However, you have homework to do. The internet is a wild place; it’s so wild that you can get advice from everywhere. So go on Google and search for more information about Credit Scores.
Next week, we will continue the Increase My Credit Score series with How to Increase and Maintain Your Credit Score. Stay Tune!
All you need in life is faith!
