Why you should check your credit before you wreck your credit.
What if you knew that a mysterious three-digit number was preventing you from owning the condo of your dreams or a car that doesn’t require a jump-start every morning? Wouldn’t you want to learn more about it? Aside from your bank PIN, a credit score is one of the only numbers standing between you, your money, and—to crib from the book of Oprah—your best financial self. And yet many people are unaware of its existence.
A credit score is essentially a measure of your financial health at a point in time, and how it stacks up against the rest of the population. And your number isn’t just benignly floating in the ether: It determines a bank’s willingness to approve your credit and loan applications, which come in handy if you want to rent an apartment, buy a house, a car, or insurance. It’s also not uncommon for employers to ask for a credit check to weed out fraudsters during the hiring process, particularly if the position involves handling the company’s financials.
You’re rated on a fluctuating scale of 300 (yikes) to 900 (yay) using a super-secret formula known only to credit bureaus like Equifax and TransUnion Canada. You’ll start encountering resistance from the bank in doling out loans or credit cards when your rating is 650 or lower. From my vantage point, words like “mortgage” and “insurance” sound like terms that real grown-ups use when they don’t want you to know what they’re talking about. So, if we’re taking our sweet time reaching significant, adult-style commitments—specifically, ones that might require a credit check—how relevant is a credit score, really, to the average twentysomething?
Very, says Jeffrey Schwartz, executive director of Consolidated Credit Counseling Services of Canada. “Even if you’re living on cash and not on credit, and your needs are basic, you’re still going to get older, your needs and wants will change, and you may get into a job where you need some sort of credit history,” he says, noting that unsavoury credit behaviours can remain on your file for as long as six years—your past haunting you long after you’ve put the jello shots and impulse buys away. “It may be a little shortsighted not to build good credit today if things could change tomorrow. You want to make sure you’re in a solid financial position now.”
Schwartz lists a multitude of sloppy money habits that can contribute to a less-than-stellar credit rating, which could lead to higher interest rates, or outright credit refusal. The most critical, he says, is your payment history. “If you’re late, or behind on payments by a month or two, that’s going to show up on your credit rating. You have to live within the parameters of your credit without overextending yourself.”
Also look at how much debt you’ve accumulated in relation to your credit limit. (It’s not necessarily a negative to carry a balance month-to-month.) Having no credit history at all, or a very young profile, can represent a risk to lenders, as they have little to no information with which to make a judgment about your credit-worthiness; consistently making payments—on time—is a good way of demonstrating your responsibility to lenders. Schwartz says that if you do have to carry an ongoing balance, make sure it’s no more than 50 per cent of your total limit.
So what happens when one finally decides to trade the windowless confines of their month-to-month lease on a Parkdale basement for home ownership? At that point, how can they rectify the damage of poor credit scores past? “The people that ask that are usually the ones with poor credit histories,” laughs Schwartz. In addition to making timely payments, avoid applying for all kinds of shiny, new credit cards as a way to magically start over. Schwartz recommends getting the credit you already have in shape, thus proving your financial responsibility to lenders. Steer clear of overspending and you could see improvements in your score in as little as six months.
The credit system “isn’t infallible,” so Schwartz suggests checking your credit report as often as four times a year or, at the very least, once annually for accuracy. For a fee online, or free by mail, you can request a report from TransUnion Canada or Equifax Canada, which displays everything from your banking information to your credit card payment history. For an extra few bucks, you can see your elusive score.
It might seem silly to assign so much importance to a seemingly random string of digits, but I turned 25 two days ago, and toppling over the quarter-life cliff has roused in me a sort of mortal unease. I suppose mailing away for my credit score isn’t the worst way to ring in a new year. After all, age ain’t nothing but a number—a credit score, however, means a little more than that.