Maintain your financial wellness with good credit health

Just as achieving a good fitness level requires sticking to a regular, sustained exercise regime, achieving a healthy credit score is all about consistency. And just as it’s easier to stay in shape than it is to get back in shape, a good credit score is easier to maintain than to build back up again—not to mention far better for your overall financial health.

What are my credit history and credit score, and why are they important?

As you take out loans, pay your bills and generally go about making financial transactions, some of that financial information is collected by central credit agencies, which then make that collected information available to potential creditors. This is your credit history. Creditors will use this history to look at and assess how you pay your bills and repay loans, how many credit cards you have, their balance, how much credit you have available, if you’ve filed for bankruptcy, how many times you’ve been late with payments, your debt levels and any other types of information that might help them decide whether you’re a good credit risk or a bad credit risk.

Your credit score is an assessment based on your credit history, with several ranked criteria: your previous payment history (about 35 per cent of score); your current level of indebtedness (about 30 per cent); length of credit history (about 15 per cent); the number and frequency of new credit enquiries (about 10 per cent); and the types of credit you have (about 10 per cent).

The most obvious advantage of having a good credit history and credit score is that creditors such as mortgage and credit card providers will be willing to extend you credit. But a credit check may also be required in situations you might not expect, such as when you want to sign a rental agreement, apply for a job or open a bank account—the sort of everyday transactions without which it can be difficult to live your life. Having poor credit can be severely limiting.

How do I build a good credit score and credit history?

To have a good credit history, you first have to have a history of using credit. If you don’t have any record of owing money and paying it back, your score may be a low as a result.

If you have no credit history and want to build your rating, one option is to start using a credit card and make a habit of paying it off every month. Over time, potential creditors will look favourably on your responsible use of credit.

Another way of building good credit is to pay your bills on time and, whenever possible, in full. Though utility payments like cable and hydro don’t appear on your credit report, many companies (some cell phone companies, for example) will report payments that are late or absent. In either case, it’s always good practice to pay your bills on time, and in situations where it’s possible to make a minimum payment (such as with a credit card), at the very least pay that minimum. Remember, though, that paying in full looks better on your credit report.

If you have outstanding debts, paying them down as much as possible is another way of giving your credit score a boost. Doing so will also likely be good for your bank account in the long term, saving you on interest fees.

Finally, keep your credit applications to a minimum. Credit agencies track all the ways you use credit, including how often you apply for it and how much you have available at any one time. Applying for too many credit cards in a short space of time can peg you as a “credit seeker,” and potential creditor might view you as a risky gamble. A simple rule: don’t apply for more credit than you need.

What if I’ve fallen behind?

All of the above strategies belong to the ideal world. In the real world, sometimes we miss a cell phone bill or have difficulty paying off our credit cards in full each month. Rest assured, if you forget to pay a bill every once in a while, it likely isn’t the end of the world, and your credit score should still be in solid standing. Make it a regular occurrence, though, or allow it to get to the point where you have collections agencies chasing you, and it might take some real work to get your credit score—and perhaps your overall finances—back into shape.

If you’ve been behind in your payments or otherwise mismanaging your credit, cutting back on your available credit and beginning to make regular, on-time payments will put you on the path toward a better credit score. This can be easier said than done, however, and if your credit or debt troubles are getting to be too much to handle, a good option might be to get in touch with a not-for-profit credit counselling service. They’ll be able to give you the specific advice you need to prioritize and manage your debts while continuing to go about your life. For this type of service, the Credit Counselling Society of BC is a great resource.