Credit Score Range

Credit card company: “Get a credit card to improve your credit score range…you’ll need it in the future”

Parents: “Debt is bad, you already have student loans, you’re going to dig yourself in too deep!”

Friend: “Dude, check out my new card, I get three points for every round of beer I buy, pretty sweet eh?”

It’s pretty likely that by the time you hit university you have heard the use of credit being discussed around you in some capacity.  Maybe your parents talked about it once, or your dumb old business teacher tried to enlighten you on the topic.  Chances are you didn’t pay attention because for most of us the bank of mom and dad is about all we know when it comes to credit.  Mistakes at the bank of mom and dad are often forgiven without future penalty and can usually be made up in some way.  Not so for the ‘real world’ of credit.

The term credit encompasses any time that currency is lent to you in any shape or form.  Mortgages, lines of credit, student credit cards, car loans, student loans, overdue bills and even store payment plans are all examples of credit and contribute to something called a credit score. Your credit score is relative to the scores of everyone else.  Collectively this is called the credit score range.  The various ways you apply for, use, and keep credit of all kinds affects your credit score.

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In Canada and the USA a company called the Fair Isaac Corporation (FICO) collects the huge amount of credit information out there on individuals and analyzes it before giving it back to banks, stores and other lending institutions through companies like Equifax and TransUnion. “Why do I need to worry about credit score ranges right now?” you might ask.  While it is true your credit score might not hugely affect you as a student, the decisions you make as a student will impact your credit score long into adulthood and could seriously limit your future financial options.  

Companies give much better interest rates to individuals with good use of historical use of credit and good credit scores.  If your score is in the lower part of the credit score range there is a good chance you might be unable to receive credit at many places.  This can mean no car, or a shot at your dream house falling through one day all because you didn’t listen to your boring old business teacher.  Paying attention to your credit score and doing your best to improve it can save you a ton of money.  A difference in interest rates of 2% on a 3 year car loan for 20,000 can mean a $1,000 difference.  When applied to home mortgages of hundreds of thousands of dollars, even a few hundredths (.01) of a percentage point can mean thousands of dollars of difference, and these interest rates are heavily influenced by your credit score. The credit score range in Canada is between 300 and 900 points.  In the USA it is very similarly calculated, but it is between 300-850 points.  The below graphic was taken from the Financial Consumer Agency of Canada (FCAC) and illustrates how FICO scores break down across Canada.

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I would assume the pattern would very much the same in the USA.  So now that we know what a credit score is, the next thing we should look at is how it is calculated so we can begin to figure out juts how to get into that 800 range.  Below is a chart showing roughly how your FICO score comes about:

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As you can see, pretty much every experience you have with credit impacts your score in some fashion.  Your payment history includes everything from your phone bill to a car payment.  How much you owe as a general percentage of your income and credit availability is also taken into consideration.  Have you been applying for too much credit lately?  All of these things factor into your score.  Perhaps the most interesting concept for me is that someone with a fair amount of debt will often have a much higher credit score than someone with no debt at all.  This is because if someone has no experience with credit, lending institutions will often find them a much bigger risk than someone with debt who has a consistent record of making their payments on time and has proven that they can use credit responsibly. The system seems to work fairly well as shown by the chart below.  The scores represent a fairly consistent decline in credit defaults as people score higher on the FICO credit score range.

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What You Can Do To Make Your Credit Score Better?

This more or less proves that the ranking system is accurate. So the obvious concluding question is, “What can I do to make sure I have the best credit score possible so that I can get all the benefits and avoid the potential downfalls?”  Here are a few common ways to boost your credit score:

  • The easiest way to boost your credit score is to pay your bills on time, even one late or non-payment can hurt your rating considerably.  I pay all my bills online as I find it easier and more time efficient.
  • Always pay as much of your bill as you can, you have to at least pay the minimal payment on debt such as that on credit cards.
  • Sign up for a low interest line of credit, or a credit card (maybe even two) that you can pay off monthly.  Remember that someone with no experience handling credit is extremely scary to a lending institution.
  • Be proactive about contacting creditors if you’re having trouble making payments.  Most places will help you out as opposed to having you default on the credit.  After all, they’re making a lot of money off of your interest payments.
  • Make sure your monthly account balances are correct.  Stay on top of your various bills and payments by staying organized.
  • Get a copy of your credit report at least once a year.  It only takes a few minutes to look over and it’s free to ask for.  It could save you a lot of headaches when you go to apply for a car loan or mortgage only to find out you are ineligible due to a misunderstanding.
  • Don’t use any credit where you are not sure about the rate of interest, and general terms and conditions.  This is a common mistake amongst students.
  • Don’t ever go over the limit on lines of credit or credit cards.  This tells banks and other companies that you cannot live within your means and you cannot be trusted with any more credit.
  • Learn the difference between good credit and bad credit.  Borrowing money to buy a house, or a student loan to attain a degree are both forms of good credit that lending institutions will look favourably upon.  Multiple credit cards with balances maxed out and monthly minimums that eat up most of your income are an obvious red flag to everyone.

The best part is the vast majority of these can all be done as a student.  This means that you can establish a great credit rating before you get into ‘the real world’ and have to begin making all those huge credit-intensive decisions like buying a house!  Don’t make the same mistakes many students do, use your credit cards responsibly and be content to know that as you build on your academic record, you are also building a good credit score range for yourself to enjoy upon graduation.

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