The interest rate you pay on loans for every major purchase you make throughout your lifetime depends on various factors, and is dependent on your creditworthiness – everything from the mortgage on your home to your car loan or line of credit.
And, given today’s ever-changing mortgage requirements and rising interest rate environment, your credit score has become even more important.
Your first step towards credit awareness and well being is to know where you stand. Request a free copy of your credit report online from the two Canadian credit-reporting agencies – Equifax Canada and TransUnion Canada – at least once a year.
This will also help verify that your personal information is up to date and ensure you haven’t been the victim of identity fraud.
Newly established credit
If you’re new to credit, you may wonder why your credit score pales in comparison to your friend’s.
Payment history is a key factor for both Equifax and TransUnion. As well, if you don’t talk to your friends about money, you may not realize that their financial situations are different from yours. Your friend with the better credit score may carry less debt than you, for instance.
Using credit properly helps keep your credit score healthy, as well as comes in handy when you don’t have the cash immediately on hand to pay for an expense. Planning for expenses helps alleviate reliance on credit – and the payment of interest.
If you use credit cards and lines of credit to your full advantage, you’ll never have to pay interest on these revolving credit products. In fact, you can use the borrowed money for free if the full amounts are paid on time.
Forgot to pay a credit card bill?
Your credit generally only takes a hit after you miss two consecutive payments.
You’ll likely see a drop of 60-100 points on your credit score instantly, and your credit card provider may end up increasing your interest rate.
Every point counts, however, so you obviously don’t want your credit score to take a hit, particularly if you plan on applying for a major loan – such as a mortgage or car loan.
Know your creditworthiness
Following are some key components that help determine your credit score.
Credit card debt. Aside from paying bills on time, the number one way to increase your credit score is to pay down your credit cards so they’re below 70% of your limits. Credit card usage has a more significant impact on credit scores than car loans, lines of credit and so on.
Credit history. More established credit is better quality If you’re no longer using your older credit cards, the issuers may stop updating your accounts. If this happens, the cards can lose their weight in the credit formula and, therefore, may not be as valuable. Use these cards periodically and pay them off.
Credit reporting errors. Always dispute any mistakes or situations that may harm your credit score. If, for instance, a cell phone bill is incorrect and the company will not amend it, you can dispute this by making the credit bureau(s) aware of the situation.
Do you have questions about your credit score or creditworthiness? Contact your local Dominion Lending Centres mortgage specialist.