As part of my “day job” I have the duty of performing credit checks for customers who wish to get new cell phone service. Based on those checks, customers may have NO deposit required – clearly the best option – or upwards of $1000 in the some of the worse cases. So, what exactly goes into a credit check? What is a credit score, and how do you make sure it’s the best it can be? Do YOU know what types of factors affect your credit score? As a student, what can YOU do to improve and maintain a healthy credit score?

It is SO much more complex than I have space to explain, but here are some key points in understanding one of the most important things you own. In writing this blog post, I borrow and link to a couple of different sites that deal with credit scores and credit reports in much more detail.

Credit Bureaus – TransUnion and Equifax are two of the largest credit reporting agencies in Canada. Very simply put, they are responsible for collecting information about you, the various forms of credit you have and how long it takes you to pay back that borrowed money. You can acquire credit reports from each of them at no cost, and I would recommend having a look at yours to see what it's all about.

Credit Reports – Essentially, this is a snapshot of your credit history at any given time, and it is used by potential lenders to determine your credit worthiness. Oh, that term “credit worthiness”. I have told countless applicants who have required deposits that it had nothing to do with us, but rather their own credit worthiness. You can see some great examples of credit reports in this document located on the Financial Consumer Agency of Canada website. It’s worth your while to check it out and see what information of yours is collected as you build up your credit worthiness.

Credit Scores – Both TransUnion and Equifax use a rating scale that ranges between 300 and 900, with the higher number equating to the better credit score.  This means there is less risk for the lender, as a higher score means you have managed to minimize your dependence on credit and have managed to keep your payments timely, among other things as we’ll see below. ThickenMyWallet has a great post about credit scores that I suggest reading.

I had a chance to speak with Paul Eichenbaum, Senior Manager of Portfolio Management & Credit Strategy with RBC. He said that with credit scores “there are no personal biases involved.”  I had never really thought it that way before.  Also, he assures me that upon performing a credit check, the score you receive is not always a final decider towards securing a loan, as every situation is looked at on an individual basis.  So fret not, if your credit score is not as high as you would like it. Something may be able to be worked out between yourself and the financial institution.

Factors Affecting Credit Scores – While not all factors carry the same weight, in terms of affecting your credit score, there are some basic points to consider (also found in the above-linked FCAC document, on page 7):

• Pay on time. I know, this sounds overly simplistic but carrying a balance from month to month and missing payments can really affect you negatively. Don’t let carelessness or procrastination impact your credit score.
• Pretty safe bet for MOST people reading this, but try not to declare bankruptcy. Had to be said. It’s a huge hit to your credit score. Avoid this if at all possible.
• Keep your total amount of outstanding credit balances as low as possible. This goes together with paying on time. If you have the means to do this, just make sure it happens.

Keep That Score Up – In crafting this section, I realized that many of the points I intended to cover are included in this blog post, again on ThickenMyWallet. I don’t intend to repeat them all, so I will just mention one thing from my own experience. Having finally managed to pay off (maybe just temporarily if the Student Loans folks want some money back, after I made more money this school-year than I had estimated) two of my credit cards and pay down the third, I have to say that it is a bad idea to get multiple credit cards. Having two cards can be useful in times of emergency (as can be seen in this post) but things can easily get out of hand, leading to a credit nightmare. I consider myself to be pretty level-headed and able to control spending and yet I somehow ended up (at one point) with three credit cards all near their limits (three different banks) a store credit card (this one I managed to pay regularly), a student line of credit, and student loans. Don’t do that. Once upon a time I had a decent credit score, and although it’s improving I doubt it’s anywhere near impressive.

Speaking to Mr.Eichenbaum, my suspicions were confirmed in this regard.  He says that although an established credit history is important, that having several credit cards – especially with balances close to their limits – can be detrimental to credit scores.  Surprisingly, having a few cards with small balances is considered to demonstrate that you don’t need your credit cards to sustain yourself.  I once thought that it appeared to lenders that at any given time you could max them out and run up quite a credit tab.  Apparently that’s not the case.

I hope this has helped you to better understand that elusive profile of you that exists for the purpose of determining your borrowing power. As always, any tips or experiences are welcome.