Credit bureaus are a mysterious, yet vital piece of a successful personal finance plan. Your credit bureau has the power to help, or hinder your personal financial journey. It can help you get your dream home, or cause a loan to be declined. Surprisingly, the exact formula that determines your credit bureau is a secret. Thankfully, we know the general principles that lead to a healthy credit bureau. By following a few principles you can increase your likelihood of achieving your future financial goals.
Yet again, thanks again for dropping by! If you enjoy this article, please consider sharing it with someone that it may help. You can also find more about The Friendly Financial Coach and our push to increase financial education here!
Your credit report is a summary of your entire credit history, this includes; your personal information, your credit products, amounts owing, and if there is any negative history – like collections or a bankruptcy. All of this information is then crunched through a secret algorithm that generates your credit score. Credit scores range from 300 to 900 (0 if you don’t have any history, and 900 being the best possible score). Businesses, banks, and organizations all will use your credit scores to determine if and how they lend to you. On top of that, many landlords and even employers will request your credit bureau. In other words, your credit score is very important.
The two credit bureaus in Canada are Equifax and Transunion. The information and internal procedures are slightly different, but they are fairly similar with each other. Typically, financial institutions will just use one of the two credit bureaus to gather your information.
How To Optimize Your Credit Bureau Score!
1. Your Credit History
Just as the title states, your past credit activity shapes your credit bureau. Late payments, past collections, bankruptcies and more can all negatively affect your credit bureau. This is where it’s important to make sure that all of your payments are made on time and to contact your credit issuer as soon as possible if there are any financial problems.
Annually, it’s recommended to verify the accuracy of your information at both credit bureaus and immediately report any irregularities. You can verify your credit report by ordering your information online or by mail. Transunion and Equifax both offer a free credit report and premium options for a fee. The free options can be found here and here.
2. Credit Utilization
The amount of used credit also affects your credit score. The Financial Consumer Agency of Canada (FCAC) reports that you shouldn’t use more that 35% of your total credit limit, which is all of your credit limits added together. So for example, you should not use more that $1,750 if your combined lending limits equal $5,000. Using more than 35% of your total credit limits will degrade your credit score.
However, the opposite can be true too. You will not develop a credit score if you rarely use your credit products. Contrary to some beliefs you don’t need to keep a monthly balance and instead it is best to use your credit products and then pay it off in full.
3. Length of Credit History
Your credit score is greater when your credit bureau has been active for a long period of time. This also applies to individual credit products because you’re deemed to be more responsible and dependable when you have properly managed your credit over an extended period of time. Therefore, it’s a good idea to keep your older credit cards active.
4. Number of Inquiries
The number of credit checks performed also affect your credit bureau. There are two types of credit checks, called a “hard check” and a “soft check”. Hard checks affect your credit score and occur when you apply for a credit card, car loan, rental application and much more. Soft checks usually happen when you open up a bank account or when you check your own credit score. It’s always a good idea to ask the person doing the credit check how it will impact you before they do it.
Occasional credit checks every six months or so is not a problem, but they can quickly degrade your credit score if they are repeatedly done.
5. Types of Credit
The types of credit that you have also affects your credit score. Your credit score will be greater if you have a mixture of credit products; for example a loan, line of credit and credit card instead of just credit cards. Thankfully, this principle has the smallest impact on your credit score.
Your Future Credit Bureau
Even though the formula behind your credit bureau is a mystery, you can maximize your credit bureau score by following the above five principles. Of course, it’s easier said than done, but these guidelines can still help guide you in the future.
As always thanks for reading, and if you have any questions please contact me at firstname.lastname@example.org or 647-289-0012.
Please sign up for my e-newsletter! You’ll be the first to read our exciting Financial Literacy Articles and you’ll also receive the most up-to-date personal finance new.