Verily, verily, I tell you, credit score is an unfathomable mystery. These three little numbers that sum up your credit report play a key role in your financial life: your score determines whether or not you will get credit, whether you will be granted a favorable or exorbitant interest rate.
However, it is impossible to know exactly how the credit agencies establish this famous score. We know a little about the ingredients, but the recipe remains secret. Worse: consumers are forced to pay to know their score.
And it would also be very useful for consumers to know exactly how this famous score is established, which ranges from 300 to 900, the highest score being the best.
Currently, they are in the dark. Recently, a young man in his thirties who started investing in real estate told me that his credit score, which had hovered around 770 for several years, had mysteriously dropped to 740. “I pay all my accounts up to date. I pay my entire credit card balance each month. In all my life, I have never paid a cent in interest on credit cards,” he swears.
So what happened? In each bank, he is given a different explanation to justify the 40-point drop in his score. One bank even maintains that its score is even lower, at 713. Where does this difference come from?
You should know that credit agencies like Equifax or TransUnion each have their own method for establishing credit scores. And in recent years, they have developed all sorts of other scores to meet specific needs. The score that the consumer obtains by consulting his credit report is therefore not necessarily the same as the one used by the company.
Nothing to help consumers find their way around!
PAY RUBIS ON THE NAIL
Never leave a small outstanding balance, like $5 on an old cell phone account, lying around. Even if the amount is insignificant, the impact can be devastating.
To make the most of the interest-free period of credit cards, some make their payment the day before the deadline. Bad idea ! Make your payment one week in advance. Better: sign up for automatic payment to avoid silly little delays.
DON’T WAIT TO GET BORED
If you are unable to pay your credit card balance in full, make at least the minimum payment. If you are unable to repay your debts as planned, contact your lender immediately to find a solution. If you wait a few months, your credit score will already be damaged and it may be too late to consolidate your debts.
AVOID GETTING NOSE STUCK OVER YOUR CREDIT LIMIT
When you use your full credit limit, you send the signal that you are in distress to the credit agencies.
If possible, don’t use more than a third of your credit limit. This will improve your score. If you regularly use two-thirds of the granted credit, it is not too serious. But if you exceed 75%, it will be harmful, warns Denis Doucet, spokesperson for Multi-Prêts.
DON’T MAKE TOO MANY CREDIT APPLICATIONS
Too many credit inquiries will melt your score. So don’t exceed two requests per year, suggests Mr. Doucet.