Unlocking Financial Freedom: The Lowdown on Credit Scores and Credit Reports

Today, let's unravel the mystery behind something crucial for your financial journey: your credit score. You’ve heard of it, you know it’s important, but what exactly is this magic number, and why should you care? Let's break it down in plain English.

What's a Credit Score?

Think of your credit score as your financial report card, your adulting GPA. It's a number that reflects how responsible you've been with borrowed money. Ranging from 300 to 900 in Canada (300 to 850 in the US). Just like a GPA, the higher your score, the better. The credit report is a longer document that includes your credit score, as well as the individual criteria that are used to calculate the score itself. 

Why Does It Matter?

Is a bank or company willing to trust you with their money.

Most adults will need to borrow money and show they are responsible to pay what they owe on time. Whether it’s to buy a car, a home, apply for a credit card or start a business, your credit score is a VIP pass for lenders. The better your score, the more likely you are to snag a loan. 

How expensive your loan will be.

The lender (organization that will give you the loan), will assess your credit score not only to decide if they should lend it to you, but also how to price it. Simply put, the better your credit score, the cheaper your loan will be. For example, you might qualify for a 5% auto loan if you have a good credit score, and 12% if you have a poor credit score. On a $20,000 loan, that’s a difference of $1400 in a single year!

It pays off to have a good credit score.   

Renting a home.

Landlords often check credit scores to make sure you are trustworthy to make your rent payments on time. A good score can make it easier to secure that dream apartment.

Job opportunities.

Some employers peek at credit scores during hiring. It's not about snooping; they might see it as a sign of responsibility. A good score could give you an extra edge in the job market.

How to Build Your Credit Score?

Pay your bills on time.

Timely payments are golden. Set up reminders or auto-pay to ensure you never miss a due date.

Keep credit card balances low. 

This is called your utilization: how much of the credit line do you use. Keeping balances low compared to your credit limit (i.e. how much you're allowed to borrow on your card) is a score-boosting move.

Limit the number of times you ask for credit.

Every time you give permission to an organization to check your credit score (i.e. every time you formally apply for a credit product), you get what is called a ‘hard inquiry’ on your credit report. A high number of inquiries could be a sign that someone is in financial distress, and thus has a negative impact on your score. For example if  you go and apply for 5 different credit cards to see which one you might be approved for, that will negatively affect your score. 

Some organizations will offer to ‘soft check’ your credit report to give you a sneak preview on whether you might get approved for a product or not. The soft check will not get reported to your credit report and not impact your credit score. However, if upon the outcome (i.e. the company tells you ‘you would get approved for this product’), you actually go through the full application, the company will still submit a hard inquiry and that one will be listed on your credit report.  

Regularly check your score.

Monitoring your score is like keeping tabs on your health. Use reputable platforms to check your score regularly and catch any issues early. If you’re in Canada, Borrowell or Clearscore have good products that track your score for free. In the US, Credit Karma does the same thing. <I have no affiliation with these companies>

Your bank also likely has this feature if you poke around your online banking account.  

Are There Some Watch Outs? 

Unfortunately, I often speak to women especially who falsely believe they are taking the right steps to build their credit. Here are a few common mistakes to watch out for: 

• You have a credit card but you are an authorized user under someone else’s account (partner, parent, etc). This does NOT contribute to building  your credit score. In fact, you are building this other person’s credit score (but they are also liable for your debt).

• You have a mortgage and pay it on time, but you are not listed as a co-borrower. This does NOT contribute to building your credit score

• You are borrowing money from a friend, family member, etc. Even if you are paying it back on the agreed upon schedule, you are NOT building your credit score. 

• You have a high income, a checking account and / or sizeable savings and investment. While that’s a good foundation for wealth creation, this does NOT build your credit score either. 

Bottom-line: Why Should a Wealth-Building Feminist Care? 

A strong credit score is your ticket to financial independence. It opens doors, whether you're launching a business, buying property, or securing favourable loan terms. Building your credit score is a powerful step toward claiming control over your financial destiny.

So, let's embrace the credit score journey. It's not just a number; it's your adulting GPA. Use it wisely as you chart your course toward financial freedom!