What Exactly is a Credit Score?
We often hear about credit checks and credit scores, but what exactly is credit? According to the Government of Canada, your credit score is a rating that is calculated based on how well you use credit. If you pay your loans on time, your score goes up. If you are late or delinquent on payments, your score goes down. In Canada, Equifax and TransUnion are the two main credit bureaus that formulate your credit score.
Improving Your Credit
It can take some time to improve your credit but there are a number of things that you can do to help speed up the process:
- Pay your bills on time, every time. On time payments account for around 35% of your credit score and make a big difference in your overall rating.
- Keep your spending in check. If you have a high balance on any or all of your credit cards, your credit score could suffer. Around 30% of your credit score is related to how much credit you are using.
- Consider your income when you make larger purchases, not just how much credit you are offered. Make sure that your payments will be manageable within your current household budget.
- Try to avoid multiple loan applications. Each inquiry can negatively impact your credit score.
Auto Loans Can Be Useful for Improving Credit
All of these steps for improving your score assume that you already have access to some credit. If you are just starting out, are new to the country or have made some credit mistakes in the past, improving your credit score can be a little trickier. An auto loan may be a good way to get on the right path.
Since auto loans are secured, which means that they are backed by collateral (the car you are buying), they are generally a little easier to get. Many dealerships and some auto loan specialists offer subprime loans for people with low credit scores or little credit history. These types of loans may have a slightly higher interest rate, but if paid on time each month for the course of the loan they can make a positive impact on your credit score.
Whether you are just starting out in building your credit or you are trying to recover from some previous credit mistakes, staying on top of your bills and keeping spending in check will go a long way. An auto loan with payments that fit within your monthly budget can help as well. Even though it can take some time, working on your credit score will be worth it in the future.