Credit

Your credit score shows your credit history over the past six years. In Canada, credit scores are from 300 to 900, and the higher the better.

A credit score is how banks learn about a person’s chances of paying off debt. You need a good credit score to buy items that cost more than the cash you have on hand, like a home, vehicle, electronics and more. A poor credit score shows lenders that you could be a high-risk borrower, meaning they will offer higher interest or be less likely to lend you money at all.

Understand the components included in your credit report.

Your overall score

The higher your rating, the better your score. Credit scores can range from 300 to 900. A score over 725 is typically considered good.

Code letters

• I – Installment loans with fixed payments over a certain period of time.
• O – Open credit with payments due at the end of a specific period.
• R – Revolving credit showing regular payments based on your account balance.
• M – Mortgage
• L – Lease Account

Credit inquiries

Hard inquiries vs. soft inquiries

There are two kinds of inquiries that companies can check to see your credit report—hard inquiries and soft inquiries.

• Hard inquiries, like applying for a credit card, vehicle loan or applying to rent an apartment, can change your credit score by up to 5 points, per credit check.
• Soft inquiries, like checking your own report or getting a background check when starting with a new job, typically will not change your credit score.

For a more in-depth explanation of your score, check out this downloadable guide. You'll learn about:

• Credit code letters 
• Credit mistakes
• Hard vs. soft inquiry
• Where to check your credit score safely

#1: Pay your bills on time and pay as much as you can.

Making a credit card payment one day late will hurt your score. If you're paying online, make the payment at least three banking days before it's due for processing. Setting up a small automatic payment to your card issuer each month will guarantee that you pay the minimum required payment.

#2: Never go over your credit limit.

If you're close to maxing out your card, pay more than the minimum, or the interest due could push you over your limit. Going even $5 over your limit could lead to a costly fee from your credit card company. It will also hurt your score every month if it happens.

#3: Don't apply for store credit cards.

Even if you're just after a one-time discount for signing up, these cards, with interest rates as high as 29 per cent, are viewed negatively by the credit bureau and may drag down your score.

#4: Make payments on time and close accounts carefully.

Even if you're in a dispute with a lender, make your payments. A missed payment will show up on your credit report and negatively impact your score.
When closing an account, get it in writing that it is closed with a zero balance.

#5: Don't close unused credit cards.

If you have a low-interest card you don't use, keep it open and use it periodically. Having a zero-balance credit card helps improve a low score.

#6: Don't apply for too much credit at the same time.

Avoid leasing a car, signing up for a new cell phone and applying for a loan all in the same month. The credit bureau sees this as a sign of financial trouble.
Steer clear of being pre-approved by several lenders before you're ready to buy. Although you can check your own credit rating without penalty, preapprovals from lenders count against your score.

1. Credit cards

Credit card fundamentals
A credit card is an example of revolving credit. This type of credit can be used and paid down repeatedly as long as the account is open, within a set limit.

Credit cards can be paid in person or online. A credit card is also one of the easiest ways to build your credit score, if used responsibly. If you use it regularly, make timely payments and keep a low balance, your score will get higher soon.

If you have a rewards card, the points you earn can turn into free travel, merchandise, offer cash back or add funds to savings.

Using a credit card responsibly

Stick to these two principles and you’ll be well on your way to taking charge of your credit cards:

• Spend responsibly: overspending and having a high balance are the main risks of credit cards. Spending as much as you know you can pay back will keep you at a low or zero balance.
• Know your limit: keeping a low credit limit on your cards will help you avoid overspending. Banking mobile apps allow you to regularly check your credit card usage.

What’s the right card for you?

• If you pay off the balance each month, try a rewards card. You have the option of cash-back cards or travel rewards cards.
• If you don’t pay off your balance every month, try a low-interest card. It can save you thousands.

Tips for using a credit card safely

Out and about

• Limit the number of cards you have, keep them in a safe place and in sight when making a purchase.
• Cover the payment terminal keypad with your hand or body when entering your PIN.

Online

• Use only trusted, secure websites. Avoid public WiFi when sharing personal information, shopping or banking online.
• Keep your computer firewall, anti-virus and anti-spyware systems up to date.
• Never give out credit card information (including photos of your credit card) over text or email.

At home

• Get rid of expired credit cards. Cut them up, and shred receipts and statements when you no longer need them.
• Verify the amount charged to your card matches the amount you paid.
• Report lost or stolen cards immediately.

More information about credit cards:

• Credit limits
• Chargebacks
• Cash advances
• Balance transfers

2. Lines of credit

What is a line of credit?
A personal line of credit (LOC) is a revolving loan attached to a deposit account. You can take out funds whenever you want and repay the principal any time. Like a credit card, it’s flexible in terms of repayments, allowing you to pay as much as you want, whenever you want—as long as you pay the minimum monthly payment. It’s a low-cost borrowing option with lower interest rates than other credit products.

Interest and making payments
Your minimum monthly payment on a line of credit is the interest you owe on the balance, but you can repay more when you’d like. Interest rates are variable (can change at any time) based on the prime rate. Any payment that is over the minimum will go into the credit balance each month. A line of credit is a revolving loan. Once you pay it back you can use the funds again.

When should you use a line of credit?
Let’s start with scenarios where you wouldn’t use a LOC. Typically you wouldn’t use a line of credit for a large one-time purchase, like buying a car. A regular loan would be a better option in that case because the amount of money you need is fixed. There’s also no benefit to using a line of credit for your daily transactions since you’d have to pay interest on it.

Here are ways you could use a line of credit:

• Emergencies: a line of credit can help when the unexpected hits if you don’t have money available.
• As a credit card alternative: it’s a lower-cost borrowing option compared to credit cards and you’ll pay less interest. With flexible repayment, you can pay back the principal and have funds again when needed.

How to use a LOC:

• With any revolving credit, it’s important to know how you’re spending. Have a plan for how you’ll pay it back, including the day of the month and the amount.
• Check your spending and make sure it doesn’t go beyond your means. Keep an eye on what you owe frequently, so there are no surprises.
• Set up automatic payments or transfers to a LOC. This guarantees that you’re always making the minimum payment.

3. Personal loans

What is a personal loan?
Personal loans are an example of installment credit. There’s a fixed amount of money borrowed and a fixed monthly payment schedule for a set amount of time.

Secured vs. unsecured loans

A secured loan can help applicants get a larger amount or a lower interest rate by providing security (i.e. collateral) on the loan. Some examples of collateral you can put against the loan include personal property, investments or other eligible securities. If you were late on a payment, the bank can take possession of the asset and sell it to get back some of their costs.

An unsecured loan can be used for specific purchases or consolidating debt—paying off credit cards or combining a number of small loans. You don’t need to have a tangible asset, but your credit score will determine the size of the loan and the interest rate you’ll pay.

What can personal loans be used for?
Personal loans are usually used for specific purchases:

Home renovations
Vehicles
Debt consolidation
Furniture