Why does your credit score matter?
Why does your credit score matter? A credit score is highly influential in almost all financial transactions. Today’s economy runs on credit. Consumers, purchasers, and business ventures are highly dependent on credit nowadays. Credit scores determine whether you get loans and the rates you pay. If you want to get a mortgage for a house, a car loan, or a student loan to pay for college, or if you only want to charge your lunch on a credit card, you need a lender to extend you a line of credit. You’ll also need to be worthy of that line of credit. Your creditworthiness is defined by your three-digit credit score and is the key to your financial life.
The importance of credit scores is not merely restricted to those who seek credit. It can also help you get more attractive insurance options and even present a more responsible image in the eyes of prospective employers. Let us learn more about credit score definition, how it is calculated, and how you can check them.
What is a credit score?
A credit score is usually a three-digit number that lenders use to help them decide whether you get a mortgage, a car loan, a credit card, or some other line of credit and the interest rate you are charged for this credit. The score is a picture of you as a credit risk to the lender at the time of your application. Scores range from approximately 300 to 900. When locking in an interest rate, the higher your score, the better the terms of credit you are likely to receive.
How to check your credit score
You can access your credit score online from Canada’s two (2) main credit bureaus. Equifax and TransUnion. These are private companies that keep track of how you use your credit. They assess public records and information from lenders like banks, collection agencies, and credit card issuers to determine your credit score. Once a year, you can request a copy of your credit report by mail for free, though if you want instant results online, it will cost you. There is a fee. You can also check your credit score from credible third-party websites such as Borrowell and Bankrate.
How is your credit score calculated?
It’s impossible to know how much your credit score will change based on your actions. Each credit bureau has its credit scoring model, which they use to compute your credit score. Your score may be different, but the factors that each bureau takes into consideration are the same, which are as follows:
- Payment History: 35%
- Amounts owed: 30%
- Length of credit history: 15%
- New credit: 10%
- Types of credit used: 10%
Payment History
Payment History details your track record of paying back your debts on time. It’s the most important factor influencing your credit score. This component encompasses your payments on credit cards, retail accounts, installment loans (such as automobile or student loans), finance company accounts, and mortgages. Public records and reports detailing such items as bankruptcies, foreclosures, suits, liens, judgments, and wage attachments also are considered. A history of prompt payments of at least the minimum amount due helps your score. Late or missed payments can hurt your score.
Amounts Owed or Credit Utilization
The amounts owed or your credit utilization ratio reflects how much of your available credit you’re currently using. If you want good credit, keep your credit utilization below 30 percent of your available credit. For example, if you have $10,000 in available credit, try not to let your total credit card balances exceed $3,000. If your credit card balances surpass that 30 percent mark, pay them off quickly if possible. That way, those high balances will have less opportunity to lower your credit score.
Length of Credit History
Length of Credit History refers to how long you have had and used credit. This includes the age of your oldest credit account, your newest credit account, and the average age of all your accounts. The longer your history of responsible credit management, the better your score will be because lenders have a better opportunity to see your repayment pattern. If you have paid on time every time, then it’s good for you.
New Credit
The number of new credit accounts you apply for impacts 10% of your credit score. When you apply for a new credit card, loan, or mortgage, a “hard” inquiry appears on your credit report when the lender checks your credit file. This lowers your credit score by a few points every time it occurs and stays on your credit report for two years (although the negative impact lessens over time). If lenders see too many hard inquiries on your credit report during a short period, it may signal them that you are a high-risk consumer and may deny your application. However, checking your credit reports and scores is considered a “soft” inquiry and does not negatively impact your credit.
Types of Credit Used
Types of credit used. People with top credit scores often carry a diverse portfolio of credit accounts, which includes a car loan, credit card, student loan, mortgage, or other credit products. Credit scoring models consider types of accounts and how many of each you have as a sign of how well you manage a wide range of credit products.
Why does your credit score matter?
Your credit scores are important because they play a significant role in your ability to reach financial goals, such as buying a home or vehicle. Credit scores are a financial tool, in other words, but whether they’re a lever or a hammer depends on how good they are. Your credit score is one of the factors that helps a bank or lender determine whether to accept your loan application and how much they’re willing to lend you, and, depending on your score, it could also impact the term and interest rates they will offer.
The lower your credit score is, the higher the risk you are to the bank or lender. The higher the number, the better it looks in their eyes, and the higher your chances of getting approved.
The importance of knowing your credit score
Since credit scores affect your ability to get credit in the future. Knowing where your credit score stands before applying for a new credit card or loan can help give you insight into which products you may qualify for and what interest rates you can expect. Credit scores have become an integral part of our financial lives. It pays to keep track of yours and understand how your financial decisions or actions affect the numbers. Once you know what has been affecting your credit, you can take steps to maintain and achieve healthy behaviors. And take advantage of great credit despite your age or income.
Need to Finance a Vehicle?
On the other hand, if you’re in the market for getting a car loan, we can help! Here at Vancouver Auto Loan, we can help you get approved for a car loan regardless of your credit rating. We have financing options available for everyone. Whether you want a new or used vehicle, we can assist. Get pre-approved here today! You can also call us here at 1-855-227-1669 for urgent assistance. We’ve been helping many people in and around Vancouver with their vehicle financing. Because of that, there’s no doubt that we can be your best option. We’ll ensure to provide you with a deal suitable to your needs.
