Your credit score is a three-digit number that has a huge impact on your financial life. It influences everything from the interest rates you get on loans to whether you’re approved for a new apartment. This guide explains why it’s so important to check your credit score regularly and how to do it.
Think of your credit score as a financial report card. It summarizes your borrowing and repayment history, giving lenders a quick snapshot of your creditworthiness. A strong score can unlock better interest rates, higher borrowing limits, and a wider range of financial opportunities. On the other hand, a low score can make it harder and more expensive to borrow money.
Regularly checking your credit score and report is a fundamental part of managing your financial health. It allows you to catch errors, protect yourself from fraud, and understand how your financial habits affect your score. By staying informed, you can take control of your financial narrative and work towards building a stronger financial future.
What is a credit score vs. a credit report?
It’s easy to confuse a credit score with a credit report, but they serve different functions. Both are crucial for understanding your financial standing.
Credit Score
Your credit score is a three-digit number, typically ranging from 300 to 900 in Canada. It’s calculated based on the information in your credit report and serves as a quick summary of your credit risk.
Lenders use this score to determine how likely you are to repay debt. A higher score indicates a lower risk, making you a more attractive borrower.
Credit Report
Your credit report is a detailed record of your credit history. It includes personal information, a list of your credit accounts (like credit cards and loans), your payment history, and any credit inquiries made by lenders.
The report provides a comprehensive overview of your financial obligations and how you’ve managed them over time.
Why you should check your credit score regularly
Monitoring your credit is a proactive step toward financial wellness. Here are five key reasons why you should make it a regular habit.
1. Protect yourself from fraud
Identity theft is a growing concern, and your credit report is often one of the first places fraudulent activity appears.
Unauthorized accounts or inquiries can be a red flag. By regularly reviewing your report, you can spot suspicious activity early and take action to protect your identity and finances.
2. Correct errors and inaccuracies
A 2014 report from the Public Interest Advocacy Centre (PIAC) found that about 18% of Canadians have faced errors on their credit reports.
These mistakes can range from incorrect personal information to misreported payments or accounts that are wrongly listed as open.
Such errors can unfairly lower your score, so it’s vital to identify and dispute them with the credit bureaus.
3. Understand and improve your score
Your credit report provides insight into the factors that influence your score. By reviewing it, you can see which behaviors are helping or hurting your credit.
For example, you can track your payment history, see your credit utilization ratio, and understand the impact of opening new accounts. This knowledge empowers you to make changes that can improve your score over time.
4. Seize financial opportunities
A good credit score can open doors to better financial products. Whether you’re applying for a mortgage, a car loan, or a new credit card, a higher score often means lower interest rates and more favorable terms.
Checking your score before a major application ensures you’re in the best possible position to get approved and save money.
5. Boost your financial literacy
Regularly engaging with your credit report deepens your understanding of personal finance. It helps you become more aware of how credit works and how your decisions impact your financial reputation. This confidence and knowledge are essential for navigating your financial journey effectively.
How your credit score is calculated
Credit scores are determined by credit scoring models that analyze the information in your credit report. While the exact formulas are proprietary, they generally weigh five main factors:
- Payment history (35%): This is the most significant factor. Consistently paying your bills on time has the biggest positive impact on your score.
- Credit utilization (30%): This refers to the amount of credit you’re using compared to your total available credit. Keeping this ratio low (ideally below 30%) is best for your score.
- Length of credit history (15%): A longer history of responsible credit management can improve your score. This is why it’s often advised not to close old credit accounts.
- New credit (10-12%): Applying for multiple new credit accounts in a short period can temporarily lower your score. Each application typically results in a “hard inquiry” on your report.
- Types of credit (5-7%): Having a healthy mix of different types of credit, such as credit cards, retail accounts, and installment loans (like a mortgage or car loan), can positively affect your score.
How to check your credit score and report
In Canada, you have the right to access your credit report for free from the two national credit bureaus: Equifax and TransUnion. Here are three common ways to do it:
- Directly from credit bureaus: You can request a free copy of your credit report by mail from both Equifax and TransUnion. They also offer online portals where you can access your report and score, sometimes for a fee.
- Through credit monitoring services: Companies like Borrowell, ClearScore, and Credit Karma provide free access to your credit score and report. These services often update monthly and may include tools to help you monitor and improve your credit.
- Via financial institutions: Many banks and credit card companies offer free credit score access to their customers through their online banking platforms or mobile apps.
Checking your own credit score is considered a “soft inquiry” and does not affect your score, so you can check it as often as you like.
Take charge of your financial health!
Your credit score is more than just a number; it’s a key indicator of your financial health that follows you throughout your life. It can influence your ability to secure a loan, rent an apartment, or even land a job.
By making it a habit to check your credit score and report, you are taking a crucial step toward building a secure financial future.
This simple action empowers you with the knowledge to protect yourself from fraud, correct errors, and make informed decisions that will benefit you for years to come. Start today by requesting your free credit report and taking control of your financial story!