The dreaded credit score: Simplified

Oh no, the dreaded credit score.

Those are two words I would wager most youth are apathetic toward or, if you’re like me, downright intimidated by.

According to a survey by The Canada Life Assurance Co., Canadians in their 20s carried the worst average quiz score (56 per cent) when rating their financial knowledge on various topics. These included inflation, capital gains, registered retirement savings plans and tax-free savings accounts. However, they also showed the most interest in learning more about personal finance.

Growing gaps between interest, knowledge and confidence have spurred advocacy for expanding curriculum-linked resources and external educational programming.

Corinna Dempster, a consultant with McKinsey & Company, tells Youth Mind, “I believe financial literacy equips youth with essential skills and knowledge to secure their financial futures in a time of elevated inflation and heightened uncertainty. In my experience, young people today tend to lack confidence when discussing personal finances. Money is a difficult and loaded conversation.” 

But fear not, personal finance does not have to be the nerve-racking, headache-spawning, intimidating subject we’ve often neglected.

As a disclaimer: I am not a financial professional. I am a 23-year-old graduate student. I believe education is the first step to curbing financial anxiety. While this does not have to entail signing up for a four-hour seminar or cracking a 400-page book on how to make your money make you money, it can mean taking a few minutes to understand what a credit score is and why it matters.

What’s a good credit score? (The short version)

According to the Government of Canada, a credit report is a summary of your credit history cultivated when you borrow money or apply for credit. It is generated automatically – you do not have to sign up for a report or score. If you’ve ever paid a bill or opened a credit card, then you have a credit score! The score shows how well you manage your credit and acts as a risk assessment for lenders.

The information in your credit report establishes your credit score, which is a three-digit number between 300 and 900. The higher your score, the better. The higher your score, the easier it may be for you to get approved for loans, larger purchases such as a home, and more competitive interest rates.

According to Equifax, a good credit score is between 660 to 724, very good is between 725 to 759, and excellent is above 760. According to Scotiabank, the average Canadian has a credit score of 667.

You earn points if you use your credit responsibly and lose them if you have trouble managing your credit. Several factors may affect your credit score. These include:

• how long you’ve had credit
• if you regularly miss payments
• the total amount of outstanding debts
• being close to, at or above your credit limit
• if your debts were sent to a collection agency
• and any record of insolvency or bankruptcy

While this sounds like a lot to keep track of, it’s as simple as making payments in full on time and not exceeding your credit limit. This includes repaying student loans according to the agreed-upon schedule.

According to Equifax, five things that may hurt your credit score include late payments, having a high debt-to-credit utilization ratio (which concerns how much of your available credit you’re using compared to the total amount available), applying for a lot of credit at once, closing a credit card account and stopping credit-related activities for an extended period.

The Government of Canada identifies Equifax and TransUnion as the two main Canadian credit bureaus that offer virtual access to your credit report.

There are “hard” credit pulls and “soft” credit pulls. According to Forbes, a “hard” credit pull occurs when you apply for something such as a credit card, an apartment or a loan. A “hard” credit pull has the potential to lower your credit score. This differs from “soft” credit pulls, which have no impact on your credit score. These inquiries are only visible on consumer disclosure, which include the reports you can personally solicit from Equifax and TransUnion.

For more information:

• Seek advice from a financial advisor at your local bank
• Government of Canada Credit Report and Score Basics
• RICH GIRL, BROKE GIRL by Kelley Keehn
• The Budgette Blog
• More Money Podcast with Jessica Moorhouse