Your credit score is based on a handful of different factors, so when your credit score changes, you may not be sure what caused it.
“Credit scores show your past history of debt repayment,” says Victoria Hall, Digital Banking Advisor at Cambrian. “Your score gives lenders an idea of what your spending habits are like.”
Essentially, credit scores measure how reliable you are at paying back debt. The higher your score, the more likely financial institutions are to lend you money – because they have more confidence you’ll pay it back.
If your credit score drops, don’t panic! It’s not permanent. A Cambrian Advisor can try to help bring your score back up.
We met with Victoria to learn more about what makes credit scores decrease:
Credit scores are calculated by the two credit bureaus in Canada: Equifax and TransUnion.
A credit score is more than just a number – it has tangible impacts on other aspects of your finances, including:
Notice a change in your credit score? You may be wondering why your credit score dropped if you haven’t missed payments.
But first, let’s clear up a common misconception: Your credit score does not drop when you check it!
Your score is affected by hard inquiries, which is when you apply for a new type of credit or loan – not when you check it yourself.
Now, let’s dive into the real reasons why your credit score may have lowered:
“One of the main reasons why credit scores drop is from missed payments,” says Victoria.
“If you have a balance owing, don’t make a lump payment one month and then skip the next month - be consistent!”
Even if you can’t pay the balance off in full, try to make the minimum payments each month to build a consistent credit history.
Your credit utilization ratio measures how much of your available credit you use.
To the credit system, someone who uses most or all of their available credit is at a higher risk of defaulting on payments.
Aim to use 30% or less of your available credit to lower your credit utilization ratio!
When reviewing your credit report, do you spot signs of identity theft or fraud?
It’s important to dispute these errors so that they can be taken off your credit report. To do so, contact the credit bureau directly.
Has an auto loan dropped your credit score? It might not be from the loan itself, but from shopping around for a better rate.
“If you’re shopping for a car at different dealerships, do not consent to multiple hard credit inquiries,” says Victoria.
“To the credit system, it looks like credit seeking behaviour - another factor that lowers your score.”
“Claiming bankruptcy or getting a consumer proposals can affect your credit score for 6-7 years,” says Victoria. “That’s why it’s best to meet with a Cambrian Advisor before that happens, so we can look into other solutions.”
You’re probably wondering what you can do to make your credit score bounce back. To improve your credit score, make note of these tips!
If you become the victim of identity theft or fraud, you may notice errors on your credit report.
It’s important to raise these errors with your credit bureau so you can have them corrected. Once the errors are removed from your credit report, your score should improve.
“Always have a cushion between your limit and your balance,” says Victoria.
“For example, let’s say your limit is $5,000, but your balance is also $5,000. To the credit system, it shows that if you had a higher credit limit, then your spending would be higher, too.”
“Instead, maintain a buffer between the two so that credit bureaus see you’re not always at the limit.”
Using 30% or less of your available credit will ensure that your spending will not negatively affect your credit score.
Make sure to make your credit or loan payments on time, every time.
“Your credit card company can help you set up automatic payments, so the minimum balance is paid to your credit card every month automatically!” says Victoria.
“If you’re struggling to manage debt, come see us! We can try to help,” says Victoria.
“We can try to put high-interest debt into a Payoff Loan and set up structured payments.”
“Making structured, on-time payments plays a huge role in your credit score. To the credit system, it shows you’re consistently paying back what you owe, and your debt is not increasing.”
Let’s work together to improve your credit score! Book a meeting today.
We would be happy to discuss your unique situation with you.
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