Here’s what most Canadians probably know about their credit score: It’s a number that falls somewhere on a scale of 300 to 900 – and the higher the number, the generally easier and cheaper it is to obtain. credit.
Whether you want to take out a mortgage or car loan, a good credit rating improves your chances of getting approved and getting a lower interest rate. A high score can also give you access to instant approval credit cards and loans.
But here’s something you probably didn’t know:
No one really knows how credit scores work
For obvious reasons, Canada’s two credit bureaus, Equifax and TransUnion, do not disclose the exact formula by which they establish credit scores. If they did, it would become easy for anyone to play with the system.
The implication here is that most of the advice you get on how to improve, build or repair your credit score is really an educated guess. Based on anecdotal evidence and what they see in client relationships, financial advisers have a pretty good idea of how different types of behavior affect credit scores. But they can’t say exactly what difference each is really making.
That’s why Douglas Hoyes, Licensed Insolvency Trustee at Hoyes, Michalos and Associates, based in Kitchener, Ont., Is skeptical of strategies that involve taking on expensive loans just so you can supposedly build or fix your score. credit faster.
LOOK BELOW: Huge price to pay for payday loans
Borrowing at, say, 30 percent interest is guaranteed to cost you a pretty penny. The payoff, on the other hand, is quite uncertain. Taking out a loan will definitely improve your score if you make your payments on time, but what difference will it really make? No one can say for sure.
Given the uncertainty, Hoyes advises borrowing through the cheapest debt you can access and is confident that your credit score will improve gradually if you keep your finances under control.
WATCH BELOW: Dollars and Common Sense: Credit Score Basics
For those who do not have a credit history or a bad credit rating, a good first step is to get a secured credit card such as the Home Trust Visa, according to Hoyes. “Secured” credit means that the lender will ask you to put up, say, a security deposit of $ 1,000 for a credit card limit of $ 1,000. The purpose of such a credit card is not to borrow money to finance expenses for which you have no cash on hand, but to show that you can make disciplined debt repayments. .
Secured credit cards usually come with high interest rates. The no-charge version of Home Trust Visa charges 19.99% interest, but borrowers don’t have to worry about that if they pay off their balance in full and on time, Hoyes noted.
Credit scores are designed with banks in mind, not you
You might think that diligently paying your credit card bills as soon as they arrive would get you the best possible score. You may be wrong.
Some financial advisers and debt management experts believe that keeping a small balance of up to 30% of your available credit on your card might actually increase your score more than having a zero balance.
That’s because “credit scores are for banks, not you,” Hoyes said.
Banks are happy with customers who repay their debt reliably. But they also make money by charging interest. Thus, they can be more satisfied with customers who will eventually pay off their debt but still have a balance on which they will have to pay interest, Hoyes explained.
He advises doing what’s best for your wallet and not engaging in financial behavior that will ultimately cost you more, even if it means your credit score will be a bit lower.
Credit scores don’t matter as much as you think
A third thing to keep in mind about credit scores is that they aren’t necessarily the only metric a bank will use to assess your creditworthiness. “Banks may also have their own formulas, which are different from those used by Equifax and TransUnion,” Hoyes noted.
Finally, he added, a bad credit rating won’t stop you from borrowing forever. Even bankruptcy is something you can get over pretty quickly, if you have a good, stable job and exercise financial discipline, Hoyes said.
“I have a lot of clients who bought homes two years after being released from bankruptcy,” he told Global News.
© 2017 Global News, a division of Corus Entertainment Inc.