The topic of credit scores is probably one of the most asked about when it comes to the Miles and Points game. Let’s face it, on the surface it seems like an ominous being that dictates or drives your credit worthiness. The anticipation of seeing what your “number” is can definitely induce some anxiety. With that being said, it’s extremely important to be mindful of your credit score, not only in terms of playing the Miles and Points game, but for your own well-being as well. Throughout this post, we’ll break down some of the sought after questions and talk about what this credit score is all about.
What is a “credit score”?
How is it calculated and by who?
What affects my credit score?
What can I do to keep my credit score in check or to improve it (or conversely how to damage it)?
Bells & Whistles:
What is a “Credit Score”?
Simply put, your credit score is a number associated with your credit report. “Okay, so what’s a credit report?” Great question. Your credit report is a summary that highlights your credit worthiness and includes such items as: your personal information (name, date of birth, address, employment info, etc) as well as a list of credit and financial related items (credit card accounts opened/closed, bank accounts opened/closed, mortgage/loan information, as well as payment history for each), and last but not least, a list of hard/soft inquiries (basically, who has been looking at your credit score/report).
Within Canada there are two credit bureaus: TransUnion and Equifax. They basically keep tabs on your credit activity and using all the aforementioned financial information, your credit score is produced. Your credit score is pretty proprietary stuff so we don’t know exactly how it’s calculated but we do know the metrics used to calculate it. Let’s take a look.
How is my Credit Score Calculated?
Payment History (35%):
This accounts for the biggest and most important chunk of your credit doughnut, er, croughnut?
Simply put, this represents how prompt or tardy your payments are. Long story short, you should NEVER miss a payment, ever. Even if a payment was $1 and late by one day and perhaps seems insignificant to you, this is seen as a giant no-no and can do major damage to your score. Please, keep this section in check and pay your bills on time.
This is the next biggest piece and an equally important one as well. Credit utilization/usage is related to how much of your available credit are you actually using. The bureaus will tell you to keep utilization below 35% but we can and should aim for a lower amount, say, in the 10-15% range. Let’s look at an example:
Say you have a credit card with a credit limit of $1000. You’re excited about the new shiny plastic and head straight to the store to buy the newest gaming system. This gaming system sets you back $650. In a few weeks’ time, your credit card turns over and you get a bill for said $650 and you happily pay it BEFORE the due date, right? Good! Being a savvy person you then check your credit score a little while later and see that it took a hit from last month. You immediately shout, “Sonoma Beach!” and wonder what happened. Well I hate to break it to you but your credit card issuer reported your utilization at 65% and as a result your credit took a dive. At the time your credit card statement was issued, you had a balance of $650 out of a total $1000 available meaning you were using 65% of the credit you were given. This is another no-no as it demonstrates a less than ideal usage of credit. How do we solve this problem? A few days or even a week before your statement is issued, pay down but leave a balance to the beat of 10-15%. Now we have a statement that shows a $100-$150 dollars out of a total $1000 and this reflects positively! Hooray! Conversely, having 0% utilization doesn’t demonstrate an effective use of credit either. Why? Because you’re not using it! Moral of the story, make small periodic purchases on some of the cards you may not use every day to show that you are using your available credit responsibly.
Credit History (15%), New Credit Inquiries (10%), Types of Credit (10%):
The length of time you’ve had an account open represents 15% of your credit score. In this case, longer the better! Keeping your oldest cards active and alive, when it makes sense to do so, is extremely beneficial as it shows responsibility and commitment and just like a good wine, it gets better with age. Same holds true for your credit history. Also, every time you apply for a new credit card or product or someone takes a peak at your credit report (there are some exceptions) your credit score takes a little hit. This usually recovers relatively quickly. Lastly, having a variety of credit products (credit cards, mortgage/loan, phone plans, etc.) is a good thing too! Variety is the spice of life after all.
This last little bit will be about what kind of things you can do to damage your score. I’ll keep this brief obviously and to the point because we don’t want you damaging your credit, right?
Things you can do to hurt your credit score/credit worthiness:
-Making late payments
-Opening a bunch of credit cards in a short period of time which not only affects your New Credit Inquiries but you Credit History as well since it lowers the average age of your credit accounts.
-Maxing out cards by the statement date
-Closing your oldest credit cards
Honestly speaking, keeping your credit score/report in check should be a high priority not just for the Miles and Points game but for your own sake. It’s a long-term commitment and having a healthy credit report in general should be something you strive for anyway. Although it’s great to see a high score, it’s not the “be all end all”. Bottom line, keep your credit healthy and be credit responsible and you’ll be just fine!
If you have any questions or comments leave them below!