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How to (credit) score: 5 things you need to know about credit and debt

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According to the Educators Financial Kickstart Challenge, 75% of education members pay their credit card balance off in full every month.

Congratulations, you’re just slightly edging out the rest of the population—with 70% of Canadians paying off their credit card balances in full every month (according to the Canadian Bankers Association).

Yet there are still a quarter of education members NOT paying their monthly balances off. 

No worries—as long as you’re making your minimum payment each month, your credit score will be unaffected…right?

Well, yes and no.

From the balance(s) you carry each month, to making payments even slightly past the due date—there are 5 things you need to know in order to maintain top marks when it comes to your credit score.

#1: The higher the credit card balance—the lower the credit score.

While making only the minimum payment on your credit card(s) every month may seem like you’re doing enough to maintain a solid credit score, you could actually be doing the opposite.

That’s because the credit bureaus look at something called a utilization ratio.

Making up approximately 30% of your credit score, the utilization ratio is the amount of revolving credit you’re currently using, divided by the total amount of revolving credit you have available. So naturally if your credit limit is $2,000 and your balance owing is $2,000, this will not get you top marks in the eyes of Equifax or TransUnion (the two main credit reporting bureaus in Canada).

If you do end up carrying a balance, aim to keep it under 35% of your total limit (or utilization ratio). This tends to be the sweet spot for the credit bureaus. Anything over this number is seen as a red flag and will weaken your credit score, whereas anything under this number will prove you’ve got a handle on your debt and will contribute to a strong credit score.

Key takeaway: If you have no choice but to hold a balance on your credit card(s), be sure to keep it under 35% of your total credit limit in order to maintain a higher credit score.

TIP: Does being early in your career and lower on the pay grid make it a challenge to keep your credit utilization ratio under 35%? Here’s how to better manage your debt and save money so you can get the ratio where it needs to be.

#2: Being just a little late with your credit card payments can cost you more than you think.

It doesn’t matter if you were too busy grading papers, coaching finals, travelling over March or summer break—or whether the dog ate your credit card statement.

To credit bureaus, there’s no excuse for missed or late payments.

Roughly 35% of your credit score is made up of your payment history—missing even a single minimum payment will affect that history (even if it was only $20).

In case you need further incentive to be prompt with your payments:

  • All of your missed/late payments stay on your credit bureau for a period of 6 years
  • Some credit card providers may also penalize consistently missed or late payments by increasing the interest rate they charge (until you get your payments back on track)

So it’s definitely in your best interest to keep on top of your payments.

Key takeaway: Always make at least the monthly minimum payment by the due date to avoid tarnishing your credit score and leaving a mark on your credit history for six 6 years.

#3: Being at the top of the pay grid doesn’t guarantee top marks on your credit score.

While having a stable job and income are both important factors to lenders, they actually have nothing to do with your credit report or credit score. In fact, your income and occupation are not even part of the credit scoring formula. While your occupation may be reported to one of the credit reporting agencies when a creditor or lender requests a copy of your credit report—your income is never reported. Your credit report only shows your payment history and credit behaviour, not your payment potential. Hence why it’s important to always make your payments on time and stay below the 35% credit utilization ratio.

Key takeaway: Good payment habits, not a steady income, are what equal a high credit score. This is something that can be achieved regardless of where you are in your career.

#4: Think you only have one credit score? Think again.

Since there are two credit-reporting agencies in Canada (Equifax and TransUnion), there’s the possibility a creditor may report to one agency, but not to the other.

Naturally these agencies can only generate credit scores and reports based on the information creditors supply to them.

Should one of them not have the same information as the other (or should they be using different software to calculate credit scores), you could find yourself having two completely different credit scores. For that reason, it’s worth checking/comparing your credit scores from both of Canada’s credit-reporting agencies to ensure they are consistent with each other.

Key takeaway: Be sure to check with both Equifax and TransUnion to ensure you’re getting the same story when it comes to your credit report and credit score.

TIP: While you have to pay to get your credit score, you can get a free credit report once a year from Equifax and/or TransUnion. Be sure to take advantage of these free reports to ensure the information contained within is correct (as misinformation could negatively affect your credit score). If you want to get your credit score without paying for it, try asking your financial institution the next time you apply for a loan or open a new account. Since they’ll ask for your permission to check your credit anyway, this is the perfect time to ask them for your credit score, as this information will be at their fingertips.

#5: When it comes to credit, if you don’t use it, you lose it.

While becoming and staying debt-free should always be a goal to strive for, it doesn’t necessarily reward you with a gold star where your credit score is concerned.

In fact, the best way to maintain a good credit score is to spend that credit—wisely (emphasis on the ‘wisely’).

As we’ve outlined above, your credit score is based on your credit behaviour and payment history, not simply how much debt you have. If you don’t have any active credit, the credit scoring system doesn’t know how you are currently handling your obligations. However, if you use one credit card occasionally and pay it off completely every time, then the credit scoring system can see that you are actually using credit responsibly. This will prove valuable when it comes time for securing loans on big purchases (such as a house or car).

Key takeaway: Being debt-free will help your credit score only as long as you maintain at least two active credit accounts (such as a credit card or line of credit).

Whether you’re looking for comprehensive credit advice, competitive rates, or a combination of both—Educators Financial Group has got you covered.

With 45 years of exclusively serving the financial needs of the education community, we can provide you with the borrowing solutions you need that fit with where you are on the pay grid. If you’re retired, we can work your pension income into the equation.

That’s the genuine difference that comes from truly knowing education members.

Whatever your financial needs, goals, or dreams—tap into the unique offering from an educator-specific organization that always has your best interest in mind.

Have one of our agents contact you.

Be sure to enhance your financial literacy on the subject of credit even further by checking out: 

How to build and maintain your credit history.

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