Your credit score is one of the most important numbers in your financial portfolio. It can have an impact in multiple areas of your life, yet despite the importance of credit scores, it’s surprising how many Canadians either do not know their credit score, or do not understand how important it is. In fact, in a 2018 survey by Refresh Financial, it was reported that only 62% of Canadians knew how to check their credit score and only 41% knew what their score was.
When you don’t know your credit score, you don’t know if it’s holding you back, and you can’t take the necessary steps to build it, and improve your financial future.
Here are 6 reasons why building your credit score is one of the smartest financial moves you can make:
- Having a good credit score will save you money
When you need to borrow money, your credit score will be taken into consideration by the lender. Not only will your credit score determine if the lender will extend the credit in the first place, but it also determines the interest rate you will be offered. Taking the time to build your credit score can mean saving thousands in interest over the course of a long loan, such as a car loan. Check out this example:
- Car Loan Size: $15,000
- Credit score: 550
- Interest rate: 15.9%
- Monthly Payments: $364
- Interest Paid over 5 Years:$6,838
- Car Loan Size: $15,000
- Credit score: 650
- Interest rate: 6.9%
- Monthly Payments: $296
- Interest Paid over 5 Years: $2,779
Savings over 5 years: 4,059
While these numbers are just estimates, they are based on actual interest rates and credit scores. It just goes to show how much money can be saved in interest with a better credit score – in this case, an increase of just 100 points.
- Having a good credit score can help you rent a place to live
While it counts only as a soft check (that is, it does not have a negative impact on your credit score), landlords are still able to check your score. They must ask your permission, but if you refuse, they may in turn refuse to rent to you. If you agree, and your score is low, the landlord may decide that you pose too much of a risk as a tenant.
Taking the time to build your credit score will give you more choice when it comes to renting a home in the future.
- Having a good credit score makes finding a job easier
Did you know, your employer can check your credit score? Many employers choose to do so as it can give a good overall indication of a potential employee’s level of responsibility. You may be hard-working, qualified, and reliable, but have a poor credit score because of something out of your control. When faced with two equal candidates, your poor credit score could be the determining factor. It is a controversial practice — employers see the practice as precautionary, whereas potential hires see it as unfair.
Even you are currently employed, life can change quickly, so prepare yourself sooner rather than later by improving your credit score before you find yourself back in the job market.
- Having a good credit score can help you buy a home
Do you one day hope to own your own home? It might seem like something that is far in the future, but it’s never too early to work on building your credit score in order to qualify for a mortgage. Interestingly, your credit score does not have to be as high as you might think when it comes to mortgage approval — usually around 680. While you are probably borrowing the highest sum of money ever in your lifetime, you are buying something that is likely to increase in value. In addition, the lender can seize the home if you fail to make your repayments. It’s not as high risk to the lender as, for example, a cash loan.
A higher credit score also means better mortgage interest rates when you do get approved for home ownership, which can save you thousands! While, as mentioned above, a score of 680 would have lenders considering your mortgage application, it’s best to wait until your score is 725 or higher, so you can unlock the lowest interest rates and have lower monthly payments.
- Having a good credit score can relieve stress
A low credit score means paying more interest every time you need to borrow money. If your score is poor, you may have to resort to payday loans if no other lender will offer you credit. Paying back loans at incredibly high interest can lead to high stress and anxiety, and this stress has only heightened amid the coronavirus pandemic.
According to 2020 research by FP Canada, 38% or respondents cited money as their greatest cause of stress, which outranked personal health (25%), work (21%) and relationships (16%). Our relationships with our significant others, our children, siblings, parents and other loved ones all become strained under the stress of money. Financial stress is also linked to depression, anxiety and heart attacks.
With a higher credit score, you know if you need a loan you will be approved at a low interest rate, which can take off some financial pressures.
- Having a good credit score means you shouldn’t have to borrow money from family
When we need financial help, the first people we often turn to is family, but this isn’t always a good idea. Although you may not be accumulating interest on the money you borrow from family, it’s still a debt that needs to be paid back. While failing to pay it back won’t impact your credit score, it could have irreversible consequences on your family relationships. Ask yourself, will my relationship with this family member survive if I am unable to pay the debt back? If the answer is no, do not borrow money from them. Even with the best intentions, you may struggle to pay the debt back.
With a good credit score, you have more options for borrowing money and won’t have to take any money from family or friends.
If you were in any doubt as to the importance of your credit score in Canada, these 6 reasons should have you convinced! If you want to own your own home one day, want to save money on interest rates, want to lower your financial stress, and more, building your credit score is one of the most important financial moves you can make. Your financial future can be dramatically altered with strong credit. So why wait? Start building your credit score today!
Refresh Financial offers custom credit building solutions depending on where you are starting from, where you hope to be, and how quickly you want to get there. Learn more about Refresh Financial’s credit building solutions.