If the world of credit boggles your mind and makes you feel like the entire financial system is out to get you, you’re not alone (and you’re not completely wrong either). The concept of credit ratings are not for you to get a read on your own finances, they’re for institutions like banks, credit card companies and even employers to put a number on how trustworthy and lucrative you are to them. Sinister, we know, but that’s just the way of the world. The best thing you can do for yourself is understand how these companies are determining your score and avoid making little mistakes that could set you back without your knowledge.
First things first: how do they even come up with that number? Five factors contribute to your credit rating, but they all carry different weight (as displayed in the comprehensive pie chart below). Ratings can be anywhere from 300 to 900 and ideally you’d have a rating higher than 750. Most notably, having a higher credit score means cheaper interest rates on loans and credit cards and easier approval for rental houses and apartments. A high score basically tells anyone who could loan you money that you’re likely to pay it back. That’s what they want.
Keeping what contributes to your score in mind, there are some common mistakes you might be making that could hurt you. Lets take a look at them so you can stop unknowingly damaging your credit.
Paying your loans in their entirety
Doesn’t everyone want to be debt-free? Yes, but your bank and credit card company don’t want you to be. They want you to consistently pay your bills, but they also want your interest. If your balance is always at zero and you never accumulate interest, your bank never makes money off you. They don’t like that so your score won’t be as good as if you let your debts accumulate a little interest before you pay them back. Totally unfair, we know, but no one said the banks like to play fair.
Cancelling your first credit card
Fifteen percent of your credit rating is determined by the length of your credit history. When you get your first credit card after you turn 18, your credit history begins. If you cancel that card once you graduate university or get your first real job, that can hurt you because you want a lengthy history for your score to pull from. Maybe consider keeping that baby around.
Applying for multiple credit cards
If you’re the type of person who has to have every card from the Tim Horton’s Double Double Visa to the PC Points MasterCard, maybe you need to reconsider. Sure, there are a ton of cool cards out there with different rewards programs and point systems, but having a plethora of credit cards doesn’t look good on your credit. It looks like you’re desperate for money (i.e. you wouldn’t be able to pay back a loan). Pick a few cards and stick with them.
Checking it too often
The worst part of this whole thing is that you can’t even check your rate without getting dinged. Obsessively checking your rate alerts the credit gods that you need it to be good for some reason. Companies read into that and assume that you’re low on money so you need good credit. You get dinged every time someone else checks your credit too. If a bank, car dealership or potential landlords and employers check your rate, that counts just the same as if you check it. Again, super unfair but that’s just how it is.
You can get one free credit report from TransUnion or Equifax a year, but anything more than that is going to cost you (in money and in credit). You should definitely get that yearly report though and double check everything that’s on it. About 30 percent of credit reports have mistakes in them and you’re going to want to catch them as early as possible.
Now, here’s a picture of the Monopoly Man, Rich Uncle Pennybags, crashing the congressional testimony of former Equifax CEO Richard Smith to maybe make you feel a little better.