Establishing a good credit score is an important part of becoming a financially responsible adult, especially as you enter the age where renting, home buying or applying for a loan is required.
In Canada, credit scores range from 300 (just getting established) up to 900 points, which is the best score. A score above 650 will probably qualify you for a standard loan while a score under 650 could make it difficult to receive new credit.
Credit scoring is used by lenders, landlords and insurers to evaluate your credit behavior and assess if there is any risk in granting you a loan. It can also affect the interest rate and credit limit offered to you by the grantor.
Here’s a look at the most common credit mistakes and how to avoid them.
Not using credit cards
It may seem counterintuitive to use credit cards, since, not using them prevents occuring credit card debt in the first place. However, in order to establish any credit at all, you need to open an account or two and then use those cards responsibly (i.e. pay credit card balance off each month) to slowly establish a line of credit. Having established credit is important when you go to buy your first car or rent an apartment.
Not having a variety of credit accounts
You’ll want to establish a strong credit profile with a balanced mix of credit accounts and loans.
Having a mix of credit products (credit card, retail store, car loan, etc) will acquire more points on your file than having only one type of credit, such as only credit cards.
Defaulting on student loans
Failure to pay on your student loans is one of the worst financial moves you can make. Not only will it hurt your credit score, your loan will be reported to the credit bureaus as being in default and the entire loan balance and any accrued interest may immediately become due and payable.
One way to avoid the burden of student debt is to start saving for an education as early as possible. Committing to a sound savings plan when you’re younger, like through a Registered Education Savings Plan (RESP), which are managed and distributed through providers like Children’s Education Funds Inc. (CEFI), can help mitigate some of the financial stress in the future.
Not paying bills on time
Pay all of your bills on time. Being delinquent or having your account sent to a collection agency will most likely have a negative impact on your credit score.
Maxing out your credit
Use credit cards within limits and try not to run your balances up. Keeping your account balances below 75% of your available credit may also help improve your credit score.
While a person can still survive with a bad credit score, it’s definitely not a financially sound move. By establishing a good credit score, you will be able to save money in the long run and make your financial life much easier.