We talk a lot about credit rating, credit history and credit rating. In parallel with topics such as how to get out of debt and budgeting, these topics are probably the most often discussed regarding personal finances. There are two reasons for this. First, lenders, banks, creditors and credit agencies tell us that credit is really important. Secondly, credit is really very important in certain situations. So when does your need to have a high credit score become the most important? We suppose, when you run out under debts.
What affects your credit rating?
Your credit rating is calculated according to 5 categories: payment history (35%), total debts (30%), credit duration (15%), diversity of accounts (10%) and recent surveys (10%). ). How you manage each of these categories dictates how high or low your credit rating will be. Each of the categories is weighted, for example, whether or not you make your payments on time is much more important than the recent credit applications that appear in your credit report.
Who is interested in your credit rating?
Your credit rating, a short three-digit number, represents you and your financial habits. If you have “bad” financial habits, your rating will be affected and if you have “good” financial habits your rating will also be affected. So who decides what is “good” and what is “bad” when it comes to financial practices? These are the people who provide loans and credit cards and the institutions that govern all that. Lenders, creditors and credit reporting agencies know what constitutes good credit. If you are dealing with one of them, your financial health is important and there is no way around it.
Do you want a good credit rating?
If you want a good credit rating in order to be approved for loans and other financial products, you must go into debt. This is a detail that many people do not know, do not want to admit, or do not like. Credit ratings are based on your ability to manage debt. If having zero debt is your number one financial goal and you have been able to reach that goal, it’s amazing and we can never congratulate you enough. But you know what? Your credit rating might not be as high as you think. It would probably not be bad, but it is certain that it would not be high either. Being in pursuit of a high credit rating is not a bad goal but we want to make sure that you understand what is happening and that going into debt of thousands of dollars to get a high credit score is not the best idea either.
Credit vs. no credit
You can live your financial life in two ways, with credit or without credit. Both options come with both advantages and disadvantages and both options are completely attainable. It simply depends on how you see the course of your life and what types of investments or purchases you hope to make and how you plan to do it. arrive. If you want to buy a home, like the majority of Canadians, it is very likely that you will need a mortgage to do so. In this case, to get an affordable mortgage, you will need a credit history and a good credit rating. This means that you are going to need to use credit products and potentially debt to achieve a high credit rating. If you are a renter (know that landlords are almost always doing a credit check, so a credit history is required) and you are planning to buy your next vehicle in cash, then your credit is not that important .
How to find a balance between your debts and a good credit rating?
If you currently have debt and want to become debt free or just looking to improve your credit, here’s what you need to know about debt management while trying to get a good credit rating.
Use of credit
As mentioned above, your credit rating is based on 5 factors and your payment history is the most important of all. The second most important factor in this calculation is the total amount of your debt. It is to this factor that you need to pay special attention if you want to maintain a good credit rating while trying to pay off your debts.
You should have a credit usage (the amount of debt you have compared to your available credit) not exceeding 30%, but lower than this is even better. Having no credit usage is not good and will even have some negative impact on your credit rating. Finally, you need to determine for yourself, based on your current level of debt, how to maintain a credit utilization rate that will allow you to repay your debt and hopefully maintain your credit rating.
Here is a quick summary of the most important points:
- Paying your debt is always a good idea.
- Maintaining a high credit rating is also a good idea, but not at the expense of managing your debts.
To maintain or build a good credit rating, you absolutely must:
Make your payments on time all the time.
Make sure your credit usage is less than 30% but greater than zero.
Know that no one really needs a credit score of 850, especially when you’re crumbling under debts.