December. The time of year everyone tells children under the age of 8 that an old white man breaking into their house in the middle of the night is ok. I have never been able to figure out if this tradition is painfully sweet or actually sadistic.
In any case, dishonesty is something we grow into. It is one of the many delightful things that accompany adulthood, alongside (1) the shattered illusion your parents are anything more than human, (2) accepting that bills are a ‘until death do us part’ responsibility, (3) a diagnosis of terminal nostalgia, and, of principal note, (4) pretending to know what your credit score actually means.
In light of it being charitable season, I will save you the trouble of the latter pretending.
A credit score is a three-digit number between 300 and 900 that indicates fiscal trustworthiness, otherwise known as “creditworthiness”. Think the Black Mirror episode where everyone is rated from 1 to 5 stars on every interaction to determine their socioeconomic status. Or, in far more horrifying terms, China’s new dystopian social credit system.
Your credit score, albeit slightly less all-encompassing, is defined by your payment history (do you pay your bills on time?), the amount of debt you have (self-explanatory), and the length of your credit history (how long have you been using credit?). It doesn’t really care about your social interactions (sorry, extroverts). Your score is basically a prediction of your likelihood to pay bills. It is used by financial institutions to determine how likely you’d be able to pay back loans.
The higher the score, the better. In short:
No one trusts you with their money: below 560
You’re doing the bare minimum: below 660
You’re a ‘trustworthy’ adult: 660-759
People are literally throwing their money at you: 760 and up
Canadian credit scores are officially calculated by two major bureaus: Equifax and TransUnion (I hope I am not the only person who had never heard of these before).
There is no magic number to reach when it comes to receiving better loan terms and your score tends to slightly vary between the two bureaus, depending on which bureau has what information on you (e.g. a missed cell bill may be reported to one bureau and not another). When we think bills only have an impact on the business we are or are not paying to – we forget that all of those decisions impact our credit score.
We have to care about this, unfortunately, as it affects not only if you’re allowed to borrow money for your small business, mortgage, etc, but also how much interest you’ll be paying for the privilege. Interest rates can be substantial or minimal, if you have an excellent credit score versus a poor one (i.e. you probably don’t want to pay an extra $100 a month for the same house – that’s like giving up 16 artisanal lattes/mo).
And yes, I know what you’re thinking because I thought it too: this article feels very geriatric, and frankly mortgage interest is far too white picket fence-y a topic for the trendy finance novice. But even the artistic vagabond needs a place to sleep and a job to buy wine. Landlords typically pull your credit before deciding to rent to you, your auto insurance rates could be higher with a low credit score, and many employers perform credit checks as part of a pre-employment background check. This is as real as it is concerning. So regrettably, we do need to care.
There’s also a term called credit utilization ratio (CUR) that I guess you should know, (this is by far my worst transition to date but I figure if I address it head-on, I don’t need to think of something clever to replace…my editor may disagree). Your CUR is the amount of credit you’re using, compared to your available credit limit.
If your balance is $800
And your limit is $2000
$800 / $2000 = 0.4. Your CUR is 40%
It is recommended by the people who know and recommend things (i.e. The Financial Consumer Agency of Canada) to keep your utilization below 35% of your total credit limit. However, if you can afford to pay your bill in full each month, that will make your credit score happiest.
It is a myth that carrying a balance helps your credit score.
I don’t know who told people this was a thing, but it is at the top of all FAQs on credit information. This is obviously a bad idea.
As a self-proclaimed financial savante, I pay my credit card off frequently. In fact, the idea of debt is so anxiety-inducing that I tend to pay off most purchases quickly after I make them. Or sometimes, I’ll make the off payment in the not-so-infrequent time I spend staring at my online banking balance, in an eternally failed attempt to think extra zeroes into existence. (I repeat: a financial savante).
It has recently come to my attention that this eagerness is slightly harmful. If you pay off your card with every transaction, or at random, it may not register that you have even used credit at all. This reports to the credit bureau that you always have a zero balance, meaning you’ll get no fun points for your spending and no improvement in your credit score (again, savante). The idea is to demonstrate an ability to put expenses on the card and then later pay that off. According to the lack of information I could find on the eager-payer, this must be a wildly infrequent problem, but on the off chance any of you are like me, stick to two payments a month?
In turn, if you’re one of those ‘Greece is to ABBA what credit cards are to me’ (your kryptonite) type people, here are some tips to keep you in check this season:
- Put a block on your credit limit: Funny how banks give you a limit but then allow you to exceed it for a penalty fee of $25-$30. Call your credit card issuer and ask for a ‘block’ on your credit limit (an actual limit) to avoid extra fees and going over budget.
- Set up pre-authorized debits: Automatically pay off your credit bill in full every month. An idiot-proof way to never pay interest or fall into debt.
Don’t forget to check your credit score earlier rather than later! It’s typically free in Canada! Financial competency is sexy!
Happy Adulting!