Canadians generally don’t know what their credit score is. Particularly if you ask a young Canadian. Nearly 40% of Canadians aged 18-24 have never checked their credit score, and are mostly unaware as to what would make up a credit score, and what would harm or help it. TransUnion recently surveyed over 500 Canadians between 18-24, including 200 students, on their credit habits and revealed several misunderstandings.
Many students have to learn how to balance their finances during their first semester of post-secondary learning, as they deal with tuition payments, student loans, bank accounts, and likely that first credit card. Students living off campus are also responsible for household payments such as hydro, gas, telephone and other monthly expenses.
There are many myths and misconceptions around credit scores which cause students confusion, and in return can result in missteps. Let’s clear up a few:
1) Myth: Checking your credit score affects your credit score.
When you check your own score with organizations like TransUnion, this neither increases nor decreases it. Checking your own score counts as a “soft inquiry” and has no affect. A “hard inquiry” is one made by a creditor or lender (i.e. for that first credit card) and can slightly lower your score. Tip: According to TransUnion most scoring models take appropriate steps to avoid lowering your score because of multiple inquiries that might occur as you shop for the best car or home loan terms.
2) Myth: You have only one credit score.
This is untrue, although 50% of students believed this. Lenders such as financial institutions use more than one scoring method. Major credit bureaus, such as TransUnion, collect information from financial institutions where you have relationships – information like how timely you pay your bills and whether or not you pay them in full – and then consolidate that data into credit reports to provide to banks and credit card companies or any other potential creditor. Those creditors use that information to determine how risky you are as a borrower and that inform the terms and rates of your loan.
3) Myth: Your bank balance appears on your credit report.
More than half thought their bank balance would turn up in their credit report, and would have an effect on it. You shouldn’t spend more than you have, of course but banks only report credit obligations to credit bureaus. So, outstanding balance, payment timing and amounts on loans, credit cards and other credit products impact your credit score. Your bank chequing or deposit account balance does not impact your credit score unless you are personally liable for a debt attached to that account.
4) Myth: Using a debit card over a credit card increases your credit score.
Fact is, using your debit card has zero effect on your credit score, but using a credit card does make a difference. Timely repayment of that credit is what affects your credit history.
5) Myth: I don’t have to monitor my credit score, yet.
The hard truth is that while 60% of students reported that they have good or excellent credit, 50% say they have never checked it. A lot can change in a credit score over the course of a year; checking it and your credit report once or twice a year is a good habit to get into.
What is a good credit score? When you obtain your credit score from TransUnion, an excellent score is 850; however, this is shared by a very small percentage of consumers. TransUnion classifies a good score through the TransUnion site as being in the range of 700-749, with a score of 658-719 purely middle of the pack. Typically, the higher the score the better. Each lender decides which credit score range it considers a good or poor credit risk.
So what should students do? Build credit early by applying for credit and use it responsibly (paying your credit obligations on time), as well as working to watch your debt can start you down the path of a good, if not great, credit score.
For more tips from TransUnion Canada, check out TransUnion.ca.