Scoring Big with Credit

Many of us have heard the terms credit report and credit score being thrown around, but before one can really understand what a credit score represents, it is important to first understand what it is based on. Credit, by definition, is borrowed money used for purchases at a present time and to be paid back, with interest, at an established future time. The most common forms of credit include credit cards, personal loans, student loans, lines of credit and mortgages. It is very important to pay this back at the assigned date as your promptness in payment plays a big role in shaping your reliability in the eyes of potential creditors.

When creditors judge your reliability, what they are really doing is assessing the likelihood of you paying back your loan without delay or conflict. This is where your credit score comes in. It is one of the criteria used by creditors to determine if you are a suitable recipient of credit. However the credit score itself is not usually calculated by creditors, rather by the three national credit reporting agencies. Equifax, TransUnion and Northern Credit Bureaus are the three credit reporting agencies responsible for determining an individual?s credit score. It is best to obtain your credit score from each of the three credit reporting agencies as it may vary slightly between them due to different criteria.

The importance of your credit score is underlined by the fact that those individuals whose scores are seen as insufficient are labeled as high risk loan candidates. Such individuals are likely to be offered extremely high interest rates or in many cases they will be refused credit or mortgages all together. A credit refusal could be a crushing blow to a couple or family looking to purchase their first home, and it really underlines the importance of maintaining a prompt repaying practice. If bad decisions early in life have damaged your credit score, do not despair. Time and appropriate repaying practice can restore your credit score to acceptable levels.

"Many Canadians don't realize how important their credit reports and credit scores really are. Your credit score can determine whether you are eligible for everything from a credit card to a mortgage," says Financial Consumer Agency of Canada (FCAC) spokesperson, Marie-France Lettre. "A low credit score can also have a big effect on your day-to-day life by increasing the overall cost of a loan or making it more difficult for you to rent an apartment or purchase a cell phone. The good news is, you can improve your credit score by paying your credit balance as quickly as possible - reimbursing a small amount on your balance, several times a month, not only helps to reduce the total amount of interest you pay, but it also shows that you are conscientious about paying back the money you have borrowed."

Furthermore, if you reduce the number of credit cards you have or the number of credit card applications you make and keep your balance well below your credit limit, in time, you will be able to improve your credit score, adds Lettre.

Lettre offers the following suggestions for improving your credit score:

• Always pay your bills on time.
• Pay your bills in full by the due date. If you are unable to do this, pay the minimum required amount shown on your credit card statement
• Pay your debts as quickly as possible
• Do not go over the credit limit on your card and keep your balance below the limit
• Reduce the number of credit applications you make. If too many potential lenders ask about your credit in a short time, it may lower your credit score
• Make sure you have a credit history. You may have a low score because you do not have a record of owing money and paying it back. You can build a credit history by using a credit card