What Do You Know About Credit Scores?Apr 18, 2018
Financial literacy amongst Canadians is on the rise, but there’s still a good percentage who don’t know how credit scores are calculated and the impact it can have on obtaining new credit. Our Licensed Insolvency Trustees (LIT) come together in this month’s podcast to go in depth on what you should know about credit scores and credit ratings including:
- Does checking your credit score actually hurt your score?
- Does high consumer debt balances negatively affect your score?
- Why closing a credit card account isn’t always a good idea.
- How parents can help teenage children build credit history and a credit score.
- Does your spouse, ex-spouse or significant other’s credit score get impacted should you file bankruptcy or a consumer proposal?
Even if you are effectively making no late payments every month and managing your debt in what seems like a responsible way, you might not be helping your credit score. Credit utilization is an important factor that gets overlooked when thinking about your credit score and credit rating.
To give it some perspective, take a look at this hypothetical scenario:
- Two people have $15,000 worth of credit each making their minimum payments on time
- Person ‘A’ carries a consumer debt load of $3,000 and Person ‘B’ has $12,000 worth of consumer debt
Who is likely to have a better credit score and why?
Person ‘A’ is likely to have a better credit score based on their credit utilization; how much debt they have compared to their credit limit. Person ‘A’ would have a credit utilization of 20 per cent; person ‘B’ comes in at 80 per cent. This means ‘A’ would be a lower risk to lenders compared to ‘B’ and likely have a higher credit score as well.
With that said, several other factors also play into a lender’s decision. This is why it is important for you to understand everything you can around credit scores and credit ratings.
Listen to this month’s podcast to improve your financial literacy on credit scores. If you’re interested, you can also go back and listen to previous podcasts to learn more on a variety of #DebtManagement related topics.