The Lazy Economist: Understanding & improving your credit score

To get the car, home, or job of your dreams, the people in charge will often examine something other than your character: your credit score.

A credit score is a rating that tells money lenders how likely you are to pay back a loan. It’s a number that encompasses all of the information in your credit report, such as the loans you’ve taken out, how many credit cards you have, how timely your payments are, and how much outstanding debt you have.

Your score can range from 300 to 900. The higher the score, the more likely you are to be approved for loans or other opportunities involving a credit check. A score over 650 to 700 is a good ballpark range to be in.

It’s important to note that, when checking your credit, there are either hard or soft inquiries. Hard inquiries occur when a company or lender requests to view your report, and multiple instances of these can actually bring down your score. Examples include applying for a new credit card or a mortgage.

On the other hand, a soft inquiry is one that doesn’t affect your credit score, like in a background check. This is why ordering your own personal report doesn’t bring down your score—it’s considered a soft inquiry. Basically, a soft inquiry is an inquiry that’s not attached to an application for new credit.

In daily life, a credit score or credit report is a quick way for someone to tell if you’re likely to be responsible, whether with their money or with a new job. As such, a bad credit score can be a roadblock to taking big life steps, such as buying a car or getting a mortgage.

If you don’t have any credit history, the best thing you can do is to start building it up early. Get a no-fee credit card and use it regularly on smaller purchases that you have the money for in your chequing account—this is key. An easy way to implement this would be to use your credit card at the grocery store every week, paying it off when you get home right afterward.

If it’s not where you want it to be, here are some ways to improve your score.

First, pay off debt: as much as you can and as soon as possible. Once you’ve gotten your debt down, keep it low—don’t spend money you don’t have.

Pay all your bills on time, even if it’s just the minimum payment—making these payments is better than making none. Consistency is key.

When using credit cards, try to stay around or below 30 per cent of your available credit—meaning if you have a $1,000 credit limit, you don’t want to regularly have more than a $300 balance.

Check your credit report to make sure it’s accurate, so there are no faulty charges or late payments bringing your score down—or, worst case scenario, that you aren’t the victim of identity theft. You can check by mail, by phone, or online, through TransUnion or Equifax.

Finally, don’t stress. If you’re reading this as a student, you’re still in a good spot to end up with a better credit score later on in your life when it matters. 

Whether you can limit your online shopping, stop ordering takeout, or trade in for a cheaper car, it will all add up down the line.