How to build a good credit score while building a family

As a kid, going to school had its upsides: hanging with friends, tons of holidays, and the classic movie afternoons on Fridays. But one thing I used to hate back then (and I still do) was how everything we did was graded. Every time I was doing something, I was effectively chasing a score, and it only got worse the further I got in school.

So now that I'm done with school and that I can focus on building a career and a family, I thought these days were over and that I wouldn't have to care about getting good grades anymore. Then I learned about credit scores and realized someone somewhere was keeping the score on all my payments and credit demands...

The good news is credit scores aren't bad at all, and in fact, they can become a powerful ally. This blog will teach you about the basics of credit scores, and how you can effectively build a solid credit score while you're busy building a family.

What is a credit score?

According to Equifax, one of the biggest consumer credit reporting agencies, a credit score is a "three-digit number designed to represent the likelihood you will pay your bills on time". While there are many credit scores out there, the most common ones will range between 300 and 850, with 850 representing the best possible score. The best way to understand how are credit scores used is to do a little role-playing exercise:

Imagine your brother calls you because he's in a pinch and needs money asap. Chances are you'll be lending him the money since he's your brother that you know better than anybody. He's reliable and will be paying back when his next paycheck comes. But what if that call came from a friend you just met a couple of months ago? You might think twice before giving money to someone you barely know, and you would be right!

This is where a credit score comes into play. Banks don't have the luxury to get to know each of their clients, so they need help in deciding who they should lend money to and on what terms. Credit scores are essentially a tag that we all have that says how safe it is to lend us money. A good credit score means we can easily be trusted with debts, and a bad one means we might have to earn the lender's trust back before we can borrow on easier terms.

Do I have a credit score?

Yes, you most certainly do. In fact, you have more than one since multiple agencies are keeping track. Credit scores are tied to your social security number, and they start as soon as you ask to borrow money. Credit cards, auto loans or taking on a lease for an apartment are often the first time someone will ask for your credit score, which means your credit scores will be created at that time. Since it's much easier to get a credit card than to buy a car or pay for an apartment, this is the moment credit history starts in most cases.

Who keeps track of the credit scores?

If teachers are the ones giving the grades in schools, who’s doing it for the credit scores? While banks and lenders appear as the logical answer, consumer credit reporting agencies are the ones tasked with this very specific job: gathering information about how people use credit and sharing them when needed, using the credit scores. Equifax and TransUnion are the only two credit reporting agencies in Canada, so they are the ones keeping track of and calculating the credit scores of everyone in the country.

Why does having a good credit score matter?

A credit score is a decision-making tool that goes beyond the "should I lend this person money or not" debate. Financial institutions, mobile phone companies, landlords and employers all use credit scores for various reasons. As stated by the government of Canada, individuals and organizations check your credit score when

• Lending you money
• Collecting a debt
• Considering you for rental housing
• Considering you for a job
• Providing you with insurance
• Offering you a promotion
• Offering you a credit increase

In short, a lot of very important steps in your life can be made easier with a good credit score. No one wants to see their dreams of buying a house be halted by a silly mistake they made on their first credit card 5 or 6 years ago. This is why keeping a good credit score matters because when you'll need it, it will be too late to start caring about it. You should always be proactive about your credit score.

How are credit scores calculated?

Credit scores are calculated using financial metrics about you in various proportions. for example, the widely-used FICO Scores are calculated using the following data and proportions:

• Payment history (35%)
• Amounts owed (30%)
• Length of credit history (15%)
• New credit (10%)
• Credit mix (10%)

As you've probably guessed, credit scores are based on how you handle your money and ignore stuff like health history or in what city you live. Keep in mind that the numbers above aren't set in stone. If you've never had any credit history, it obviously won't be used as much and so on.

So, how can I build a good credit score?

This is where the fun begins. Building a good credit score might appear as a huge challenge, but it comes like a side effect of many good financial habits you can have.

The first step is, to nobody's surprise, to make your payments on time. If you think you might miss a payment, you should try to contact the lender as soon as you can before the payment is due. Also, if you can't make the full payment on a debt, making the minimum payment will have less of a negative impact on your credit score than missing it completely.

Moreover, you will want to make sure to pay any bills that are disputed so they won't hinder your credit score. Sometimes, paying on time can become tricky with the day-to-day expenses, and having a budget with a good strategy in place is the best way to keep control of how much money goes out of your bank account.

Being smart with your credit usage, as in not maxing out all your available credit, is another way to score points with your credit score. Owing 500$ on a 1000$ credit card means you’ve used 50% of it, which doesn’t look great in the eyes of credit reporting agencies. In such cases, it could be a good idea to upgrade your credit limit in order to reduce this ratio.

Smartly using credit also means starting early and maintaining your credit accounts for a long period while limiting the number of times you apply for new credit.

But what if you're just learning all of this after you had some bad luck that took a toll on your credit score? Luckily for you, redemption is possible and it's cheaper than you think! KOHO, another innovative fintech start-up like Emma, can help you for as little as 7$/month with their Credit Building product. As long as you pay the fee on time, they will report your payment history to the agencies so you are rewarded accordingly with points towards your credit score.

Zero effort, all the rewards. I certainly wish school was like this, but it's definitely good to know someone can pull the work for my credit score while all my time can go to my family!