Financial Education: Understanding your Credit Score (Part 1/2)
June 14, 2022
Credit — What is it & Who needs it?
Asubject that most people fear for the damages it’s done to many in North America and globally. The most commonly known ‘credit’ product these days are credit cards. It’s a typical love-hate relationship for most people. I, for one, LOVE credit and credit cards. But that wasn’t always the case. What changed? Education on what it really is and what it can do!
So, let’s take a deeper look now, shall we?
The word “credit” comes from a Latin word meaning “to believe or to accept as true”. Credit refers to an arrangement by which one party receives materialistic goods or money from another party without paying for those goods or money at the time — payment is, in effect, deferred — or an “I owe you”.
Credit, like (good) debt, is a great tool for building wealth and getting access to free things (mostly through loyalty programs) when they are used properly. However, when you abuse it, it will wreak havoc and get out of control — kind of like the question: will you use your super power for good or for evil?
Before diving into the subject — simply think about where, when, how and WHO you learned the concept of ‘credit’ from? If your answer contains words like: parents, friends, TV shows, YouTube ads, radios, or maybe even ‘money education’ shows, you likely do not have a full or even proper view of what it really is.
Today, having credit is a MUST if you’re looking to be financially savvy, independent and free eventually. It’s almost as important as having a smart phone these days — which by the way, unless you pay cash for it, you’ll need some sort of credit to get on a plan and your device. So, who needs credit? The answer is probably everyone — at least everyone who’s legal in age.
Inshort, credit is essential to our day to day transactions today and an efficient way for lenders of all kinds to make quick decisions on whether someone is credit worthy. That became the birth of a credit score — after all, who doesn’t like being judged on a number system these days?
All jokes aside, this IS how lenders access and assess someone’s credit behavior that has been tracked, recorded over time and available for evaluation purposes. In plain English terms, if you borrowed money from your cousin’s friend’s best friend and didn’t pay him back from 5 years ago, there is a good chance that I will not lend you money once I find out about it.
In case you are curious about where you sit — credit score wise — you can always go to either Trans-Union or Equifax to get a copy of your credit report, which will also contain your credit score. The maximum you can score is 900 in Canada and the US. Before you jump onto either of those two sites and spend the money to get your credit report, here are some alternative ways to get it for free:
- Log in to your online banking — either your home bank or a credit product you have with any bank, and see if there’s anything there. If not, no big deal.
- You can also go to Borrowell.com, sign up for a free account, and you will be able to get a copy of your credit report.
- Other sites include CreditKarma or GreedyRates also offer access to your credit score and report.
My disclaimer here is that we are not endorsing any of these platforms by any means. This is purely suggested for the purpose of helping you save some money for now to obtain your credit report and score. It also doesn’t hurt for you to do a quick search on the internet on how to obtain your credit report (including score) for free as a quick exercise here.
So, pause here and go get your credit report now!
What’s your score?
How does your score affect your life?
Ifyou currently own a house and have a mortgage on it, chances are the interest rate you have (or the other terms like the length or your mortgage and your amortization period) is different from your neighbors even if you bought the exact same property from the same builder at the same time. This could be the result of the different credit scores you have. Like two passengers sitting side by side on a plane often times pay different fares for their tickets (except we aren’t really sure if their credit scores have anything to do with it).
How about during a water cooler conversation and you learn that Joe got a 0% interest on a car loan while Mark is paying 5%? Or, that Nancy just got offered by her bank a credit card with a special interest rate of 8% when the rest of us mortals need to pay 19.99% or higher on outstanding balances?
Who died and made them King?
If you are wondering who gave Equifax or Transunion the power to grade and judge people like this, good on you. After all, we all want to be swiped right in the world of credit, right?! (Anyone got that reference?)
Truth be told, they are only the messengers to tell you what your score is and the scores come about based on 5 different factors:
- The payment history,
- The outstanding balance you have on each credit account you have,
- The length of the credit history,
- The number of credit pulls in a year* and
- The different types of credit you currently have.
Stay tuned for Part 2 where we break these down to make sure you know what they mean.
Tomy dedicated readers, I thank you for your support and feedback. If this is the first time you’re reading one of my publications, I hope you’ve enjoyed it and learned a thing or two.
If you’re wanting to be a part of a community of real estate investors from around the globe, here is the T.A.L.E.N.T.ed Investors Facebook Group. It’s a place where people come together to share experiences, knowledge, successes and challenges, and money making opportunities!
For those of you who prefer watching videos, here is the YouTube channel where some of my work (very raw) has been shared.
Lastly and definitely not least, Bootcamp! If you prefer the live interaction and delivery to help you build some foundation, our next Bootcamp is on July 23 and July 24. Go ahead and register for a session for either day to help you further your financial education.
(Written at home in Edmonton, AB)
