Your credit score is so much more than just a number. This piece of crucial information may seem deceptively straight forward, but it can tell you things about your financial health, your ability to apply for certain loans, and much more.
There are a number of misconceptions about how much your credit score can say about you and how much information determines your credit score. So, in an effort to give you a better understanding of your credit score, we’ve debunked some common misunderstandings about credit scores.
Here are five myths about your credit score, debunked and explained.
1. You only have one credit score
This seems to make a lot of sense, but in Canada, it’s very possible that you could have two differing credit scores. This is because Canada has two credit report agencies: Equifax and TransUnion. The fact that not every creditor will report the information that they have to both Equifax and TransUnion, this may affect your score with the respective agency. As well, the frequency at which they update the agencies with new information may differ.
Often these along with other factors may result in two different credit scores, which means it might be in your interest to request your credit report from both agencies and review the information on each report to ensure that they have the most recent and correct information. Learn how to read your credit report and how to check your credit report for free.
2. You won’t be able to rebuild your credit score after bankruptcy
Thankfully, filing for bankruptcy isn’t the end of the world. This financial information will only remain on your credit report for six or seven years (this number is different depending on the province in which you reside). Your credit score will be negatively impacted during those years, and it may be harder for you to be approved for such things as loans. But once those six or seven years have passed, your past debt will be erased and you will once again be able to start building your credit.
3. Such things like mortgages can affect your credit score
Surprisingly, the debt that you may incur through your mortgage is generally not reported to credit agencies. This may seem counterintuitive, as it’s often a requirement for you to have good credit in order for you to get approved for a mortgage and to get a good rate. Banks and other financial institutions have this requirement in place so as to ensure that you have the ability to repay them.
4. Cancelling old credit cards will help with your score
While it may seem to make sense to cancel your credit card accounts in an effort to limit your spending (and therefore, reduce your potential debt), cancelling your oldest card account can actually be damaging to your credit score, especially if you have good standing. In keeping it open, you can keep its long history on your credit report indefinitely.
Another thing to consider is that by paying off your oldest credit card and then closing that account may negatively impact your score, as this can appear on your credit report as a high balance-to-limit-ratio. Your balance-to-limit ratio is the amount of money you owe on your credit cards to your average available credit. This number reflects how well you manage available credit. By closing your account, you lower your available limit, as well as the average age of your accounts.
If the terms of your credit card have changed (higher annual fees, higher interest rate), then it may also be time to cancel your credit card. We do recommend that you speak with your credit card company and inquire if they can lower the rates before you cancel the account completely. As well, if you have trouble with spending and need to cancel your card to remove that temptation, then cancelling your credit card may actually be your best option, as uncontrolled spending can lead to worse debt.
5. Only large sums owed will ruin your score
One might assume that only large sums owed will threaten your credit score, but this isn’t the case. For example, if you have $4,000 of debt on one credit card and you owe 10 cents on another card, both are still considered debt, and will therefore affect your credit score in the same negative way. The most important thing is to make sure that you pay off all and any debt to ensure that you won’t be penalized and lower your credit score.
With a better understanding of how credit scores work, you can now better navigate the financial world and ensure that you avoid the potential pitfalls of managing your credit. In the event that you’re still having trouble maintaining a positive credit score, urLoan can help you rebuild your credit and regain financial health sooner through our loans. Our approvals are based on employment and verifiable income, unlike any other traditional means of credit score used by such institutions as banks, or taking security on your assets.