Credit Score Anatomy: What’s It All About?

What’s in a Credit Score?

 

I will be offering up a credit series that gives you information on what a credit score is, how to maintain it, how to maximize your credit, and how to repair it. We will go step by step, so that beginners have an opportunity to get their feet wet. If you are not a beginner, please check back or offer up your suggestions below. We’d love to feature some tried-and-true examples and some questions from those of you who are looking to build up your credit, so please contact me here.

 

credit score

 

A credit score is a numerical value that is assigned to everyone with a Social Insurance Number, or for my friends in the south, a Social Security Number.

 

This numerical value, or credit score, is calculated by one of two credit bureaus in Canada. TransUnion and Equifax obtain information from creditors, or lenders, and input all of the information into a database. Each piece of information is weighted with a significance factor to establish a credit score.

 

The Anatomy of a Credit Score

 

Credit Scores range from 300 – 900. The closer to 900 you are, the better your score. The average credit score in Canada is 749, which is considered pretty good. If you are below that number, chances are you’ve had some issues with your credit in the past.

 

There are 5 main categories that can affect your overall score:

  • How much credit you have (30%)
  • Your payment history of that credit (35%)
  • The length of time you’ve held that credit (15%)
  • How many inquiries for credit you make (10%)
  • The type of credit you have (10%)

 

How Much Credit You Have:

 

Credit is considered the borrowing power you have, or how much “trouble” you could get into.

Meet Joe. Joe is our example man today. Joe has three credit cards. He has one with his main bank, one with a retailer, and one with another institution.

Card One: Visa with Royal Bank of Canada, limit of $5,000.00.

Card Two: Mastercard with Canadian Tire, limit of $1,000.00.

Card Three: Mastercard with Scotiabank, limit of $3,000.00.

 

In this example, Joe has a borrowing power of $9,000.00 in revolving credit.

 

 

Your Payment History of that Credit

 

Every month, or every payment cycle, your creditor or lender tells the credit bureau three things: how much your balance was, how much your payment was, and if you paid it that month.

 

If you do not pay your credit account on time, the credit bureau gets notice of this, and makes a mark on your file. This affects your credit score and brings it down. If you pay your account on time, then no mark is made.

 

 

Length of Time You’ve Held Credit

 

The credit bureau likes to see that you can manage your credit, and the longer that you hold credit indicates that you can manage credit to the satisfaction or approval of the creditor.

 

It’s not set in stone how long you need to hold credit for in order for it to positively affect your credit score, but it’s always recommended to keep one or two credit cards and use them periodically to keep them active. It goes without saying that the longer you can hold credit, you must be doing something right, as the lender continues to reward you with the ability to borrow.

 

 

How Many Inquiries You Make

 

An inquiry is just that: you inquire about obtaining credit. Credit bureaus are not big fans of people who ask for credit all the time, as it makes you appear too risky. Imagine if you had two children, and one is always asking for money. Your second child does not. She uses what money she has for the things that she wants. If the second child came to you and asked for money, you’d be more inclined to give it to her than the first, simply because she doesn’t ask often.

 

Your credit works a lot like this. Credit inquiries will hurt your score, albeit temporarily, but the more you ask for, the more you will have your score drop. The more your score drops, the more likely you will not be approved for credit. It’s certainly a lose-lose situation.

 

 

The Type of Credit You Have

 

How many types of credit can you have? Here’s a list of the most common ones, and they are each weighted differently:

  • Revolving Credit, like credit cards
  • Revolving Monthly Accounts, like cell phones
  • Installment Loans, like cars or student loans
  • Installment Mortgages
  • Revolving Mortgages, like lines of credit

 

 

Take Action

 

The first step in safekeeping your credit is to do regular credit checks. You want to ensure that someone else is not using your credit, your credit is not being checked without your approval, and that your lenders are reporting your accounts accurately.

 

 

Checking Your Credit

 

Borrowell

Borrowell is a Canadian company designed to help Canadians build and improve credit. Even if you do not think you need to change your credit habits, Borrowell allows you to obtain a free credit report and score without dinging your credit score. You can track your progress over time, and get reports on how you are doing, plus they have offers for loans, credit cards and more, based on your credit profile.

 

Why I Love Borrowell

 

I started using Borrowell a couple of years ago so that I could ensure my credit was reporting correctly.

I have found inaccuracies and had them fixed. Imagine if I’d never looked!

Borrowell also sends me periodic emails to tell me that my credit score has been updated, and to confirm that any new additions to my credit are valid. They tell me if a bank has a better deal geared to my credit score, so that I could obtain a low-interest credit card, a mortgage, or qualify for a loan.

 

Plus, did I mention it was free?

 

 

Now You Know

 

Now that you understand the basics of a credit score, I recommend that you go immediately to check yours. Make sure that each account is reporting correctly, and that there are no collection amounts.

 

The next installment of this series will talk more about how to improve credit and get you to that top score.

 

Other Sites to Get a Free Score and Report:

www.creditkarma.ca

www.Mogo.ca

www.Equifax.ca

www.transunion.ca

 

This post may contain affiliate links, meaning, at no additional cost to you, I may earn a small commission if you choose to purchase through these links. Please see my disclosure for more information. Amazon Affiliate Disclosure: I am a participant in the Amazon Associates Program, an affiliate advertising program designed to provide a means for me to earn fees by providing links to Amazon.ca and affiliated sites. 

Measuring Privilege

This post may contain affiliate links, meaning, at no additional cost to you, I may earn a small commission if you choose to purchase through these links. Please see my disclosure for more information. Amazon Affiliate Disclosure: I am a participant in the Amazon Associates Program, an affiliate advertising program designed to provide a means for me to earn fees by providing links to Amazon.ca and affiliated sites. 

privilege privilege

Meet the Frugalwoods

This weekend, I read Meet the Frugalwoods: Achieving Financial Independence through Simple Living. I was hesitant to write a review of this book because I was afraid I would not find the words to explain my feelings from the book, or how it was presented.

The book is a first-person memoir-style accounting of the life of “Liz Frugalwoods”, as she is affectionately known online. Liz tells her tale which starts with the end of university, and entering into the real world as a young adult. Without telling any part of her story, she weaves you into this dreamlike state where you follow her as she becomes a married woman still seeking her own definition. You will want to cheer for her, you will want to nudge her in the right (or different) directions, and you will simply not be able to put the book down.

It’s been three days since I read the book, and I want more. I want to know what happened next, what new things they discovered as a family, etc. That’s the impression it made on me.

There are many reasons it moved me.

Liz is so resourceful and frugal! Listen to the lessons in the book. There were tons of choices that they made as a couple that the majority of us would likely have chosen different, like the apartment they stayed in. She made a comment in the book about how their friends had already inflated their lifestyles by renting or purchasing larger homes, and she and her husband were still in the basement apartment. They resist joining the race to have what the Jones’ have, they choose to use what they have, and they recognize that what they do have is enough.

Related: More about the Jones’

It’s enough.

I don’t know where you hail from. Maybe you are a low-income earner, fighting poverty. You could be someone who is newly single and looking to change your life. Or, you could be part of a family and want something different than your folks had. I don’t know your story, and it doesn’t matter because this story is for everyone.

Liz opens the book with a conversation about privilege. It’s important to understand privilege, and it’s been a very sore subject for me for some time, and I think I found out why. I was angry that I felt like I had to apologize for being privileged, like it was my choice or my fault I was born white, or heterosexual, or identifying with a female gender, or coming from two parents that are still together, or being raised with a roof over my head, and food on my table. However, by learning more and more about privilege, the reason why I was so angry was because I wasn’t.

privilege

I wasn’t as privileged as I thought.

I thought I was. Yes, all those things I mentioned are all factors that contributed to my life. It’s much more than what some others have had, and I recognize that.

However, and my parents will deny much of this, we were raised in scarcity. There was never a guarantee of anything. We were always told how fortunate we were to have a bed, a room, a home, etc. I recognize now that those statements created guilt, not gratitude, for me. We knew that we would be fed, but there was unstable employment throughout my childhood (a side-effect of living in an auto city that lost much of its auto work), which made my parents angry and likely felt hopeless, or at least desperate and embarrassed. They would tell us that we have cable – for now. We have food, but where’s the next meal coming from? It was truly confusing for a child, or at least for me. We had food stored in the basement that we put away when it was on sale, and yet we never felt as though we could just help ourselves without permission in case it was a meal for later. It always felt like we were two steps away from not having anything, and the small bit that I thought I had as a child – my room, my belongings, my space – was never mine. It was always the parents’ space, and there was not respect for space. Yes, my parents would argue that I didn’t clean my room enough, or that I forgot lunches in my school bag, or that they found inappropriate notes between friends… and I would come home and my space, my sanctuary, had been thoroughly gone through, things were re-organized, furniture relocated around the room, and the nest was gone. It was not mine to be safe in, it was always theirs.

Post-secondary education was a necessary luxury. 

I did not have education paid for, and it was never discussed that it was my responsibility to find out that there were exorbitant fees associated with the prescribed post-secondary education that one is expected to obtain. There was no instruction about money, other than the lecture that I should put some of it away because my father said so, or how funds were always limited, and cherish every dollar you had. I remember going to the mall when I was a teenager, and my friend wanted to purchase a snack. I was looking for the cheapest alternative at that place, and bought a brownie. It was one of the cheaper options on the menu, yet I remember having enough money for a brownie, and probably more, but I was buying something non-essential, and without permission. I always felt guilty about spending money. 

When freedom cost nothing but dreams.

When I was 18, there was a situation that led me to move out on my own. I recall having $2,000.00 in the bank, and thinking it was so much. I had college starting in a few months, and I found work in a local call centre. They paid enough, and I recall sitting in my cubicle, calling people to talk about going to a free seminar, or signing up for this or that event, and having people get really angry with me just doing my job. (Side note: whoever thought blowing a whistle in the phone would stop the telemarketers, please stop. We are just doing our job, and now we are doing it with hearing damage.) 

My Crown Heights, Brooklyn

My first place was the second floor of a house in a “bad neighbourhood”. The upper street was lined with half-way houses for parolees, addicts and anything inbetween, and the hospital was down the block. I had a bedroom and a second room that was converted into a kitchen, and I shared the bathroom with the thirty-something-year-old man who lived across the hall in his mirror bedroom/kitchen suite. I had orange shag carpeting, and a cinderblock basement that flooded on one half when it rained. On the dry end, there was one washer and one dryer. Thankfully, the laundry machines were included, but we were told when we could use them and use was monitored, as was our comings, going and visitors.  

privilege

It was my then-boyfriend who helped me get settled, and the rules of the house were no opposite-sex sleepovers. The older couple who lived below were used to having exchange students upstairs, so I was an anomaly for sure. During the first month or so, I didn’t speak to my parents, and six weeks into living on my own, the relationship with that boyfriend ended. He was my support system, and a friend for many years, and the loss of that relationship devastated me. Never had I felt so alone. 

The change in relationship status did not change my living arrangements. There was no happy homecoming, and the efforts required to obtain parental consent for student loans (which is how things were in the late nineties) were phenomenal. My parents had to remit forms that shared their income, and ability to assist me, and they were so secretive with the information that they mailed the application themselves. My student loans were half of what they could have been, but there was no financial support, and little emotional support, due to our broken-down relationship. 

As time passed slowly, the relationship between my folks and I started to improve. We kept our distance, as there were a lot of hurt feelings and misunderstandings. Other relatives weighed in with their opinion of a half-concocted tale they felt was the truth.

The summer before college

I worked hard that summer, and learned what it was like to be independent. My mode of transportation was either bus, walk or bike. I had a bicycle that I would ride to work, and around town. Like many, I learned how to fetch groceries with a backpack and a bike ride, or taking the bus. It meant choosing what I purchased, not in the best price per unit, but how many bags could I actually carry. I adopted my first kitten, and found out how heavy kitty litter really was when carrying it from the store to the bus to the house. I walked other places, and started to learn the neighbourhood I was in, and pushed the limits as I was a naïve, bull-headed 18-year-old on a mission, going to college alone and not knowing enough about life to warn me about the years to come.

I was a naïve, bull-headed 18-year-old on a mission, going to college alone and not knowing enough about life to warn me about the years to come. Click To Tweet

That’s the digest version of the first 18 years of my life. No family vacations, no educational symphonies or operas throughout my childhood. No summer camps, no big school trips, no escape to Paris for a week. I’ve never been a girl guide, and never been skiing. The big family outing was driving an hour away to shop in a different mall once or twice a year.

It was enough. I was enough. 

I was privileged enough to have a bed to sleep in, friends who cared, family who fed me and loved me in the ways they knew how, and to be in a good school district. I acknowledge this. I also acknowledge that life could have gone very, very differently. My parents were high school graduates, and my father returned to school for a post-secondary education after a number of lay-offs. I worked hard because I knew there was no one else to count on if I didn’t.

Perhaps that’s my privilege.

Besides talking about goals, frugality, family, and alternate ways to make things happen, the book makes the reader think. It’s possible that anyone could strive for the same kinds of goals, and I know that it created a discussion or three with my partner. He was raised in a similar income bracket, but he had more measurable privilege than I did. The home was more stable, employment was stable, and above all, his mother taught them about having enough.

We have so much, and we forget to acknowledge that it’s enough. When we have the basics, we can look forward, and create goals and have dreams. The book encouraged me to ask my partner where he saw us living in the future. While I do not have a dream of owning a homestead or living in the woods, I dream of a small home on water, where the winters are held off and tropical trees have a chance to flourish. This magical place is likely in British Columbia. I am nervous to go there in case I do not come home.

We have enough.

privilege

 

We have enough. We have each other, a roof, food in our cupboards, and jobs that pay us enough. It will never be a “banker’s” salary, and we will likely not see a high income, but together, we have as much as anyone could ask for, and that’s enough privilege for me. Thanks to the book, we have a goal that we will work towards together, for one day we will wake up and have coffee on our deck, overlooking the water and the mountains, and know that anything is possible, privileged or not.

Thank you, Elizabeth Willard Thames.

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Family Values and Wealthing Like Rabbits

Image result for dollar bills canadaFinance, investing, building independence through wealth – all of that is new to me. Growing up, my parents did not go into details about finance. We didn’t talk about money; it was inappropriate to ask personal questions about money; and you should save money because there’s so little of it, you don’t know when you will need it. Spending money made you feel guilty. Saving it made you feel like you were depriving yourself. Debt was a big secret, too. 
 
I remember tax time – my parents were especially frugal, even before it was the “in-thing” to be. They would sit at the kitchen table, and we were exiled to our bedrooms to engage ourselves into a silent and solo activity. No one could speak, and no one was allowed to step into the kitchen for fear of repercussion. It was a stressful time for all, and we were glad when it was over. 
 
Even though my sister and I were raised by the same parents, with the same lessons in life, we each took away a different attitude towards money. My sister, five years my junior, started out miserly – she did not spend easily, and she was very satisfied to have someone else pay for her. She grew into adulthood with similar values, but started to appreciate paying her way. She saved everything, spent little, and agonized over the decision for hours, before and after the purchase. 
 
I was the opposite. I learned there was a scarcity of money. Credit was amazing because it provided extra money when I didn’t have it, and I always had the best intentions on paying it back. I loved spending what I had because it felt grown up, and independent. I also thought that one day, we would have none, therefore now was the time to enjoy it. I racked up credit cards, defaulted on them, fixed my credit and paid off the cards, bought a couple of houses, went back to school, got student loans, sold a couple of houses, and racked up more credit. Had to do some serious credit work again, and start from scratch. It has taken me 20 years to learn the cost of credit. It took me fifteen years to figure out how to keep an emergency fund in my account. Yes, I was that person. 
 
I am now in my late 30’s… in fact, my birthday was last Sunday. I have very little set aside for my future; I have a Dave Ramsey beginner’s emergency fund in my account, and I have debt. I see the costs of interest each month, and vow to pay it off. 
 
(Spoiler alert: 2018 is the year it gets paid off, because I will be accountable to all of you! And I am counting on all of you to hold me accountable!)
 
I am ready to be an adult. 
 
I live in wine country. One day, I was driving home through wine country estates, and I thought, why do I have to give up my dreams? I don’t have to give them up. I need to recognize what they are, and work harder and smarter to get there. There’s nothing that says I can’t be a millionaire one day, and there’s nothing that limits my abilities other than me. 
 
This is when I started my blog. I didn’t know exactly which direction I wanted to take it, and the road was definitely the one less taken. I am okay with that. I realize the uphill battle I have, but I am ready to make money work for me, instead of working for money. (Thanks, Rich Dad, Poor Dad
 
Today I finished Wealthing Like Rabbits (check out my Financial Toolbox at the top of the page for resources). I was hesitant about reading the book, as I heard it was geared towards millennials, and 20-somethings. It is, and yet not. This book is written in simple English, and contained funny anecdotes and simple to follow examples that made me laugh out loud numerous times. In fact, the hubby stopped asking what I was laughing at because it happened so often.  
 
The book talks about realistic goals and making more of less. Life shouldn’t be about giving up luxuries today for tomorrow. It’s more of how those luxuries should be afforded, and which ones are worth it. It talks about how to pay off your debts, and how to get ahead without losing your head. 
 
By trade, my day job is working in real estate. I know what a mortgage is, how a line of credit works, and how to read an amortization schedule. I can manage rentals, give speeches on first time home buying, and anything else about residential real estate, and yet this book taught me a few things that I had never thought of before. 
 
My focus had never been on how to eliminate debt and make my money work for me. It was about doing what everyone else was doing: a 25-year mortgage, a car loan until you trade in that car for a new one, etc. I did not have the mindset to think beyond these everyday occurrences. 
 
I also did not know that I could be a millionaire by saving a quarter of that, and letting it compound over forty years while I built up that nest egg. 
 
I do not regret my youth, however I do wish there were things I had known more about. I long to know more about investing, how to get the best returns, what to do to minimize expense and maximize incomes and how to build multiple streams of income. I want to learn about passive incomes, and I want to share all of this with others who are struggling to find themselves now that we are getting older. 
 
If you are already investing, saving and driving a car that’s paid off, you likely will not gain new knowledge from this book. You will still chuckle, and hopefully you will be motivated to continue down the path you are on. If you are not saving, or need to save more, or simply wandering around in the dark, grab my hand and read this book. Together we can lead each other to a better financial place. 
 
If you read the book, what were your thoughts? If you haven’t read the book, will you?