In this modern, credit-orientated world we live in, your credit score can make it much easier or harder to achieve financial freedom.
A good credit score is the first step on the ladder toward long-term financial goals, like purchasing a car or owning a home.
Whether you’re offered a loan or credit card depends on your score. If it’s poor, interest rates are higher, and your credit limit could be on the low side. In some Canadian provinces, it even affects how much you pay for car insurance.
In this guide, we’ll look at how you can use your credit score to turbocharge your finances and enjoy financial freedom.
What is a credit score?
A credit score grades how well you handle your money. It’s a three-digit number between 300 and 900 that lets lenders easily work out how likely you are to repay the money you borrow.
Your score is calculated using information from your credit report, which records how much you owe, how many credit products you have, and whether you pay your bills on time. You have a better chance of being accepted if you have a good credit score.
Credit scores matter because they reflect how responsible you are with money, and can also indicate to lenders that you make poor decisions in other areas of your life too.
Credit scores are calculated based on payment history, credit utilization, credit history, public records, and recent credit inquiries.
What is a good credit score?
A good credit score is 660 or higher. Equifax says credit scores in the 660 to 724 range are considered good.
How a credit score affects our financial freedom
Access to loans and credit
Accessing credit can be a dilemma without a credit history and a good credit score.
When used responsibly, credit is a powerful tool for buying a home, financing a car, funding home improvements or consolidating existing debts. It can also help you start a business or act as a safety net in case of an emergency.
Credit cards are a fast way to build credit. Many Canadians use credit cards for perks. with 58% of credit card users using them to receive discounts, loyalty points and rewards points. This can be beneficial, provided you can repay the balance quickly.
Owning a home is the dream of many, and can be an important asset in retirement. A solid credit score is key to securing a mortgage.
Ultimately, using credit can help you in the short term and throughout your life, but only take on debt if you can afford it.
Better interest rates
A good credit score allows you to borrow money at lower rates than everyone else, saving you thousands of dollars in interest and fees in your lifetime.
Poor credit makes it harder to access credit and you will pay more to borrow money.
Ability to rent homes and apartments
When renting a property in Canada, a landlord might check your credit score to determine your creditworthiness. This helps them predict whether you will make your rent payments on time.
Typically, a credit score of at least 600 will be enough to rent a home or apartment. Landlords will also consider a person’s income when choosing a tenant.
Employment opportunities
In some financial industries, employers perform a credit check before hiring employees for certain positions. However, they must have your consent before they do.
If it’s a financial management role, your credit score can indicate competence and trustworthiness. An employer might want to look at how you manage your own money and determine that your finances are in order.
Lower insurance rates
Some insurance companies use credit scores to determine insurance premiums.
In some provinces, your credit score can impact your car insurance rate. However, auto insurance companies can’t use your score if you live in Ontario or Newfoundland and Labrador.
Steps to improving your credit score
Follow these steps if you want to harness the power of your credit score to improve your finances.
1. Check your credit report for errors
Make sure there are no errors on your credit report and check it regularly to spot sudden changes, identity theft and unauthorized credit inquiries.
Common errors include incorrect personal information, misspellings and inaccurate credit limits. If a payment was made on time but recorded as late, notify both the creditor and credit bureau immediately.
Look out for unfamiliar accounts and applications, and check the public records section for any unwanted negative information.
2. Make payments on time
When you use credit and repay on time, it’s reported to credit bureaus, which helps your score. Late payments negatively impact your credit score. Making payments on time accounts for 35% of your credit score.
3. Reduce your credit utilization ratio
Your credit utilization ratio, or debt-to-credit ratio, is the percentage of credit used from the total limit.
Keep your credit utilization below 30% of your credit limit to positively impact your credit score. So, if you have a $6,000 credit card, you should keep your credit utilization ratio below $1,800.
4. Don’t close old credit accounts
If you’ve had a credit card for a while, use it regularly and pay it as soon as possible. A high average account age is a positive factor when determining your credit score.
5. Limit credit applications
Too many credit applications can result in too many hard credit inquiries on your credit report, which lowers your credit score.
What to do if you have a thin credit file in Canada
Without any credit history, lenders won’t lend to you, so how do you establish a credit history in the first place?
In Canada, people with no credit or a thin credit file can use a secured credit card and other credit-building products to establish credit. If you have a poor score, you must take steps to improve your credit score.
Why financial freedom is important
Financial freedom means less stress and anxiety about money, leading to a better quality of life and more free time. You have the opportunity to pursue your passions and live life to the fullest.
Credit alone cannot bring about financial freedom, but a good credit score makes life easier and can be used as a tool to reach your financial goals.
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