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When I was growing up, my dad was constantly giving me financial advice. The minute I told him I got my first job, at age 15, he turned around and said, “make sure you save at least 10 percent of your income.”
While his recommendations to save and spend wisely were helpful, one of the best things he ever taught me about money was to achieve and maintain a good credit profile.
Your credit scores may not seem important. At first glance, it’s just a three-digit number (usually between 300 and 900 — with 900 being perfect, depending on the scoring model).
But, whether you like it or not, it can be one of the most powerful numbers in your financial life. Your credit scores represent your credit history and your ability to pay bills on time.
When your credit scores could matter most
There are a number of situations in which your credit scores may be reviewed. Here are a few times you’ll be happy to have excellent scores.
1. When you apply for credit
Whether you’re applying for a credit card, car loan or mortgage, your credit scores can have a significant impact on how lenders feel about giving you access to more credit — and how much to give you.
Your scores can also influence the interest rate lenders and credit card issuers apply to your account.
Typically, if all other factors are equal, the higher your credit scores are, the lower your interest rate should be.
For example, if you take out a mortgage with fair credit, your interest rate is likely to be higher than someone taking out the same mortgage but with excellent credit. And even a 1 percent difference in your interest rate could cost you thousands of dollars in interest per year.
To calculate how much interest you might pay on a loan or a credit card balance, you can use an online calculator.
2. When you apply to rent an apartment
While you might think your next landlord will only check references, some rental companies will also request access to your credit report.
According to the Canada Mortgage and Housing Corporation, most landlords will perform a credit check before agreeing to rent to you. This is to help the landlord determine if you can afford the rent and will make payments on time.
In this instance, the landlord would potentially look at both your scores and the payment history aspect of your report, to make sure you can afford the rent and have a history of paying on time.
3. When you’re shopping around for better rates
Your credit scores could come into play when you’re looking for better interest rates than what your current lender is offering you.
For example, if you want to refinance your mortgage, your credit scores have the ability to determine the interest rate a lender will give you.
If your credit scores have significantly improved from when you first took out your mortgage, you may qualify for a better interest rate. However, you should note that qualifying for a better rate also relies on many other factors, including your gross debt service (GDS) ratio and your total debt service (TDS) ratio.
Your gross debt service (GDS) ratio is a calculation of the total of your monthly housing costs (mortgage payment, interest on your mortgage payment, taxes and heating expenses) as a percentage of your gross monthly income. Your GDS shouldn’t be any higher than 32 percent to be considered for a mortgage.
Your total debt service (TDS) ratio is a calculation of your total monthly debt load (your housing costs, plus your auto loan, credit card payments, etc.) as a percentage of your gross monthly income. Your TDS shouldn’t be any higher than 40 percent to be considered for a mortgage.
It’s important to monitor and maintain your credit — especially considering how it can factor into some of your biggest life decisions, as well as your day-to-day finances.
Services such as Credit Karma make it easy to not only check your credit scores, but also get insight into why your credit scores change and tips on how to improve them. Now that Credit Karma is in Canada, you can check your score for free.
The score you see on Credit Karma may not be the exact score a lender uses when you apply for credit, but it can give you a better idea of where you stand.