Your credit score is crucial when applying for a home loan, auto loan, or whatever loan you want to take. A healthy credit increases your chances of getting approved by the lender and enjoying perks such as lower fees and interest rates.
Knowing your credit history is the first step to having a good credit score. In the medical profession, you have to diagnose the illness before you can start treating it. Unless you know your credit score it will be difficult to improve it.
Read this credit score guide in Canada and the ways to build or improve credit.
Components of a Credit Score
There are five components that make up your credit score. You have the length of credit history (15%), amounts owed (30%), payment history (35%), new credit (10%), and credit mix (10%). Each of these factors impacts your credit and constitutes your credit score.
In Canada, credit scores range from 300 (the lowest) to 900 (the highest). It’s crucial that you get a good to excellent credit score to apply for a loan with no hassle and lower the costs of borrowing money.
Credit Scores That Avail You of Better Rates
A good credit score depends on what scoring model you’re using. A score of 660 to 724 with Equifax is deemed to be a good credit score, while a 720 to 780 is a good rating based on TransUnion’s standards.
It means a Canadian with a score of at least 700 to 720 has more chances of getting better rates for a loan. You have a very good rating if you have 740 to 799, while 800 or higher is an excellent credit score.
Due to lower delinquency rates and improvement in credit utilization, the average score has made a 20-point increase over the past decade.
A Fair Credit Score
Individuals with a rating of 600 to 659 are considered to have a fair credit score. If you want to apply for a loan with lower interest rates, a credit score within this range may be challenging to achieve your goal.
A fair credit score signals a certain degree of risk, which makes lenders hesitant to offer better rates. Nevertheless, you might still get approved for a loan at a bit higher interest rate.
A Bad Credit Score
A credit score below 560 doesn’t bode well for loan applicants who want lower interest rates. This number means that you have a bad credit history, and lending companies might turn down your loan application, or you might pay an exorbitant cost when borrowing money.
But a bad credit score shouldn’t be a reason to lose hope. Instead, make it your motivation to improve your credit and avail of better rates in the future. You can develop a plan to build or fix your credit score before applying for any loan.
Building Your Credit
If you have zero credit history, you should start building your credit as soon as possible. There are several things you can do to build credit. One is ensuring that your utility bill payments are reported to major credit bureaus. For example, mobile phone bills and electricity bills can be used to build your credit.
Having a credit card is another way to build credit. Just keep your credit utilization ratio lower and make timely payments to achieve your goal. It’s also wise to take a credit-builder loan that’s easy to repay.
Improving Bad Credit
Fixing bad credit will take time, but it’s doable. First, you have to check your credit score to know how much work to be done to improve your credit. Then, pay your debts and bills on time and make sure it’s reported to credit bureaus.
Also, avoid applying for credit too frequently because it can further hurt your credit score. You also have to use 30% or less of your available credit. And make sure to monitor your progress.
Takeaway
Now you have an idea of how to take care of your credit score. Your credit health is important if you need to get a loan and qualify for lower interest rates. Make sure to always check your credit reports and get a good credit score. Know the strategies to build or improve your credit.
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