What is Your Credit Score?

Since I finance trucks, trailers and cars on a daily basis, credit scores are looked at every single day in my line of work.  Many of my clients ask what the score means and how to improve their own score.

A credit score is a reflection of your financial being at a point in time.  It tells lenders whether you are high or low risk to borrow money.  The higher the credit score, the lower the risk to the lender.  But this can all change as each individual’s circumstances change over time. 

Equifax Canada and Trans Union Canada are the two main credit reporting agencies in Canada.  They maintain your credit history from the day you first apply for credit.  You can obtain copies of your own report if you contact them at http://consumer.equifax.ca/home/en_ca or http://www.transunion.ca/sites/ca/home_en.page .   I encourage my clients to order their own credit report.  The only way you can improve your score, is if you look at your file.  If you have a big purchase coming up, such as a house, or a new truck and trailer, know where you stand well in advance.  You want to be in the best position with the highest credit score possible, before you ask to borrow money. A higher credit score can get you lower interest rates and a multitude of options at your disposal.    

Credit scores range from 300-900.  Each lender determines their minimum score required to borrow money.  I’m with Auto One Leasing and our minimum score for equipment financing is 620 on the consumer side.  This is different with each lending institution.  Your score determines the interest rate you will pay.  Lower scores mean higher risk and higher interest rates.

A credit score that falls between 300-559 is a poor score.  560-659 is a fair score.  660-724 is a good score.  725-759 is a very good score.  Anything above 760 is an excellent score.  A credit score is not the only determining factor for your ability to borrow.  Other things such as income, job stability, and bank statements can be a factor too.  But a minimum score is usually needed before the other items will be reviewed.

One of the most frequently asked questions I get, is how can I improve my credit score?  First and foremost, pay your bills on time!  Even cell phone bills are reported, so please pay all of your bills on time.  Excuses like I didn’t get the bill or I was in India do not work.  Try to pay your bills in full by the due date.  If you cannot pay it in full, then make the minimum payment on time.  Try to pay your debts as quickly as possible.  I get complaints that the longest term I will offer is 5 years.  It’s in your best interest to pay off debts as quickly as possible.  Stay below the limit on your credit cards.  A higher balance on credit cards can affect your credit score.  Do not make too many credit applications.  I often see enquiries pulled at every dealership in the area plus a few banks, all for one person!  Too many enquiries can bring your score down.  Lastly, make sure you have a credit history.  Someone with no or little credit will have a low score.  I see this for immigrants often.  Get a credit card as soon as you can and start using it.  Pay it in full every month to establish your history. 

I tell my clients that we cannot predict the future, and to be ready for unexpected things which can impact our lives, and our ability to pay.  If you have a mortgage for example, have a few months of payments in the bank to cover you just in case something unexpected should occur.  If you own a rental property, again have a few months of rent in an account to cover just in case the tenant moves out and the rent that was covering the mortgage payment is no longer coming in. It gives you time to find a new tenant and not be stuck.   The same goes for your truck, trailer, or car payment.  Have a few months of payments in your bank account to cover you just in case.  See if there are options like life insurance and disability coverage in case of an accident to cover your payments while you cannot work.  Be well prepared for the unexpected and know you have some time to readapt to new circumstances. Being prepared for the unexpected will keep your credit score intact, even if your life took an unpredictable turn.