Why good credit is important for young families

Why Good Credit Is Important For Young Families

As a young family, taking on extra financial responsibilities such as a new car or your first home can often be a source of stress. But with a good credit score, applying for new and affordable credit to help mitigate the costs and allow you to create a healthy financial future for your family.

What Is Good Credit?

In Canada, your credit score ranges from 300 to 900. Depending on where you fall in this range, your credit score can be seen as anything from poor to excellent. Below we’ve mapped out where you’d stand based on your credit score.

• ‍Poor: 300 - 560
• Fair: 560 - 650
• Good: 650- 725
• Very Good: 725 - 760‍
• Excellent:760 - 900

Now that you understand what is considered a good credit score, you may be wondering what exactly affects your credit score?

5 Factors That Affect The Calculation of Your Credit Score

The two Canadian credit bureaus, Equifax and TransUnion calculate your credit score based on the information they receive from your creditors. Though it’s not possible to check how your credit score is affected on a point-by-point basis, the following five factors encompass what and to what degree these factors affect your credit score.  

• Payment history -  Your payment history is the most influential factor that affects your credit score. In fact, it accounts for 35% of your credit score. As such, things like late and missed payments have the most influence over your credit score as it is a direct indicator of your ability to repay debt.
• Debts - The amount of debt you carry also affects the calculation of your credit score, this carried a weight of 30% to be exact.In addition to how much debt you carry in general, how high the balance on your credit cards is in relation to your available limit is considered when your credit score is calculated. The ratio is called the credit utilization ratio. Consumers should try to keep their credit utilization ratio to 30% or less.
• Length of credit history - The length of your credit history accounts for 15% of your credit score and is calculated by taking the average length of your open credit accounts. Basically, the longer you hold on to different credit products, that are in good standing, the better and more positively it will affect your credit score.
• Credit mix - Your credit mix accounts for 10% of your credit score. If you have a diversified portfolio of different credit products like a credit card, mortgage, car loan, a line of credit, etc, the better your credit will be. A wide variety of credits is a good indicator of how well you are able to manage different types of credit.
• New inquiries - When you apply for credit, the lender typically conducts a “hard inquiry” to see if you’re creditworthy. Too many hard inquiries usually indicate you’re having financial troubles, which can cause your application for credit to be rejected. This factor accounts for10% of your credit score.

How Young Families Can Benefit From a Healthy Credit Score

Your credit score is an indicator of how well you repay debts, which in turn shows how responsible you are and how well you manage yourself financially. As such, your credit score isn’t just used to gain access to different credit products, it’s used by employers, insurance providers, landlords, and more. Here are some of the main reasons how young families can benefit from a healthy credit score.

When Dealing With a Financial Emergency

Life is often unpredictable and can bring about unexpected expenses that can throw you off your financial tracks. Whether it’s an expensive car repair, a home repair, or a medical emergency, good credit will allow young families to get approved for new credit when faced with these unexpected expenses. For example, a personal installment loan can ease the financial burden you face by spreading out the costs into affordable monthly payments. Moreover, good credit will allow young families to get approved for new credit with lower interest rates, longer repayment periods, and a higher loan amount if they need it.

When Purchasing a New Home

You saw your dream home for sale? Well, know that owning a home is typically a big milestone many young families look forward to, but getting approved for a mortgage is not always easy. This is where having a good credit score plays an important role.After-all, your credit score is a major indicator of how risky you are as a borrower, and how likely you are to pay back the mortgage. Moreover, a good credit score can lead to affordable rates and flexible terms, making it possible for you to afford the home of your dreams.

When Purchasing a Family Vehicle

Going from a single person to a family often means your old car becomes impractical. Upgrading to a newer and larger family car can be expensive and unattainable without a loan. Good credit can help you upgrade to a large family vehicle with an affordable car loan that has low rates and flexible payment options.  

Moreover, when purchasing a car, you will require insurance, and many insurers will look at your credit to determine the premium they charge you. MyChoice can help you determine what car insurance best suits your budget especially for those planning to buy an affordable brand new car or for those who want to upgrade into a bigger family car.

When Applying For a Specialized Job

In certain industries, employers may require applicants to undergo a background check that includes a credit check during the application process. Typically, financial and security positions will require this as dysfunctional personal finances can indicate that you are an unreliable candidate.

How to Work Toward a Healthier Credit Score

If you have bad credit, it doesn’t mean it’s the end of the world. Now that you understand what affects your credit, with time and hard work you can build yourself a healthy credit score. Here are a few financial habits you should develop to help improve your credit score.

• Never miss a credit card or bill payment - As mentioned, your payment history influences your credit score the most. As such, paying your bills on time and in full is the most important habit you should develop to help improve your credit.
• Keep credit card balances under 30% of your available limit - Paying down your credit card debt will reduce your credit utilization ratio, which can negatively affect your credit score when it goes above 30%.
• Avoid too many “hard credit checks” - When you apply for credit, the lender will conduct a hard inquiry, which negatively affects your credit score by a few points. Moreover, hard inquiries stay on your credit file for up to two years and too many may be seen in a negative light by potential lenders or creditors.
• Check your credit report on a regular basis for errors - Sometimes, there can be errors on your credit report that are negatively impacting your credit score. Personal information errors, errors regarding your payment history, errors regarding accounts opened (accounts you’ve never opened can be a sign of identity theft) or closed are things you should be looking out for. Regularly checking your credit report can help you get an overview of your finances and catch errors from hurting your credit score.

Bottom Line

A healthy credit score can do wonders for a growing young family who is increasing their financial responsibilities.Understanding the value of a good credit score and what affects it can help you improve your score and use it to your advantage. In times of increased spending or financial distress, a good credit score is an important tool that can keep young families financially stable.