Stress Test: What is a good credit score? Why do the numbers change? Everything you need to know about credit scores

You had your best-laid plans and then COVID-19 came along and hammered the entire economy. But you’ve got this – if you have the right information. Join Rob Carrick and Roma Luciw on Stress Test, a podcast guiding you through one of the biggest challenges your finances will ever face.

Rob [00:00:02] Credit scores put the personal in personal finance. They’re your entire life as a borrower compressed into one number. But what qualifies as a good score? And why do these numbers bounce around all the time? What can be done to improve a bad score? These are the questions we’re looking at in today’s episode.

Roma [00:00:20] Welcome to the first episode of Season two of Stress Test, a Globe and Mail podcast that looks at how the rules of personal finance have changed in the pandemic for Gen Z and millennials.

Rob [00:00:31] I’m Rob Carrick, personal finance columnist at the Globe and Mail.

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Roma [00:00:34] And I’m Roma Luciw — personal finance editor at The Globe. Well, we’re eight months into the pandemic, and one thing we know for sure is that this is not going to be a short term thing. So what’s changed at this new stage of the pandemic? Well, we’re still working from home. I’m still in my house an awful lot. We’re still cooking from home. The breadmaking phenomenon seems to have abated, but everyone around me is getting a puppy. Rob, what’s happening in Ottawa?

Rob [00:01:05] Yeah, just so the listeners know, we’re actually operating from two cities, Roma’s in Toronto. I’m in Ottawa, where I live and have lived for a long time. People are often surprised at that, that I’m not in Toronto, but I’m not anyway. It is the beginning of November and in Ottawa, it snowed yesterday and the roads were covered with ice and were hunkering down for a long winter of uncertainty in the pandemic uncertainty and our personal finances. And I think it gives us a lot of good material to cover in season two, of Stress test.

Roma [00:01:31] When we were brainstorming four episodes for this season, we had a look at what some of your favorite episodes from last season were. Some of the things that you told us that you loved were, of course, housing. That is no surprise. The Cost of Kids episode was one that really resonated with listeners. I think that’s just because my child was on there and he was so super cute. Now, we also had really good responses to should you move back in with your parent,s how to invest during a pandemic and can you afford to live the downtown lifestyle, which was another personal favorite of mine.

Rob [00:02:06] Yeah, for sure. We’re having two episodes on housing. One is going to look at the head to head comparison of renting and owning, which is always a controversial topic. And another topic which has emerged in the pandemic, people moving out of expensive cities to bigger, cheaper homes in the suburbs and in even more distant communities. For the first episode, though, we’re drawing on questions that Roma and I have received over years and years of covering personal finance. And it covers credit scores. It’s a topic that people are super interested in, but they don’t understand very well.

Roma [00:02:39] One of the things that’s become evident to us over the years is that there’s a near obsession in Canada about credit scores. They’ve become people’s number one gauge on how they’re doing with money, but there’s not a whole lot of understanding about how they work.

Rob [00:02:55] We received a bunch of questions from readers and listeners like this one.

Submission [00:02:58] If I cancel a credit card, will that affect my score?

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Roma [00:03:02] So we’re going to get you answers. We’ll run your questions by a self-proclaimed credit score dork from Equifax, Canada, one of two big players in the business of handling credit data. But first, let’s get a sense of how people end up with a bad credit score. That’s up next.

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Roma [00:03:45] To get a sense of how people end up with a bad credit score, I spoke to Keith Emery.

Keith [00:03:49] I am the co CEO with Credit Canada Debt Solutions.

Roma [00:03:54] That’s a nonprofit credit counselling agency that aims to empower Canadians to lead healthy financial lives. One thing to note is that the vast majority of Canadians have a strong credit score. The people that Keith will be describing are a minority, they have financial troubles that may have been worsened by the pandemic. So let’s get to it. Keith, paint us a picture. The people who come to see you, how have they damaged their credit score?

Keith [00:04:20] In a number of different ways. A lot of them are delinquent on their payments or they’re getting calls from collectors. That’s often the instance that brings people in to speak with their credit counselor. And in some cases, you know, they’ve hit the limit on their credit. They’ve been using credit to maybe supplement, you know, a shortfall in their budget. So once they run out of credit room, they’re having trouble maintaining those payments and they don’t know where to turn.

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Roma [00:04:42] Where does the credit trouble start?

Keith [00:04:44] I mean, generally it’s, you know, credit cards in some cases, lines of credit, unsecured credit. Those are where we often see people fall into trouble. The interest rates are really high. So if you’re carrying a large balance on high interest credit products, you can get yourself caught in a cycle where it’s very difficult to dig your way out. And those are also the types of credit that are available when you’re starting out financially.

Roma [00:05:10] If there is sort of a one kind of a type of a person that you could describe that tends to be a client of yours, what’s that person’s description?

Keith [00:05:19] I would say in this day and age, it’s kind of a composite character. So let’s just say, number one, they might have some income instability or insufficient income. So, you know, we’re seeing a lot of clients who have, you know, maybe they’re on casual employment or gig type of employment. So their income fluctuates a lot. You couple that with the fact that their cost of living rises, has been rising. So it’s very difficult for them, first of all, to manage their budget because of these two factors. And then you throw into the mix easy access to credit. So when they find themselves in a situation where they don’t have sufficient income to meet their costs, you throw credit into the mix. They’re using credit to fill that hole. And that story almost ends invariably with them hitting the limit and then not figuring out where to go from there.

Roma [00:06:13] The people who typically come to you, how do they feel about having to do that?

Keith [00:06:17] There are some various responses. Some of them feel guilt and shame, which they really shouldn’t. It’s natural. You know, they feel guilty about the situation. There’s a lot of stress attached with money. You know, money is bound up with our own sense of self-esteem. Every credit counselor has a big box of Kleenex on their desk. You know, other people feel powerless. I think they feel that the system is built so that they can’t succeed. It just seems no matter what they do, you know, they try their best. It’s all stacked against them. And I totally get that. Sometimes I think they’re right to a certain degree. You know, it’s amazing the kind of skills that you need to be able to navigate the financial system these days. But definitely a lot of people feeling guilt, anxiety, sleeplessness. That’s a huge cohort of the clients that we see. They have those feelings.

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Roma [00:07:05] If you’re listening and wondering, I am so concerned about my credit score, I don’t think that I should do anything even though I’m having some serious financial issues. What would your message to that person be?

Keith [00:07:19] Well, talking with a credit counselor is not going to affect your credit score. You know, getting advice will not affect your credit score and burying your head in the sand? Eventually, it will affect your credit score if you don’t have a plan in place. My message to all the people who are sort of sitting on the sidelines, not sure what to do is just take that first step, talk to somebody, talk to a financial planner, or talk to a credit counselor, or even talk to a trusted family or friend and start working out what that plan is. When we deal with our clients. This story is always just they were so nervous. And once they had that friend to talk to, that ally in their corner, you know, it just took a load off because one of the issues that we find so often is the mental stress of dealing with the financial situation paralyzes people. It becomes a vicious cycle. So sometimes they just need to get a plan to feel positive and then they can build off of that positivity.

Roma [00:08:15] Thanks to Keith for taking the time to talk. You know, his last point really struck a chord with me. I can see how anxiety and stress levels when it comes to finances have really popped in recent months. We get notes from readers all the time saying that they feel stressed and unable to make any changes despite the fact that they’re really struggling.

Rob [00:08:35] I think the next segment of this episode of Stress Test is really going to put some minds at ease. We’re going to go over some questions that people have asked us about credit scores and our expert, I think she’s got some really reassuring things to say about building and maintaining a good credit score. We’ll talk to her right after the break.

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Rob [00:09:32] Julie Kozmic is the director of consumer advocacy at Equifax, Canada. She was happy to field all the listener questions sent to the show. But first, I wanted her to share the basics. To start off with. Can you tell us what the rating scale is for credit scores?

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Julie [00:09:47] Yes, credit scores are a three digit number between three hundred and nine hundred.

Rob [00:09:52] All right. So here’s the first question that was submitted.

Submission [00:09:55] What is a credit score that is good enough to get the best rate from any particular lender? And what is a score that causes a red flag to go up?

Julie [00:10:03] OK, those are great questions. So there’s a couple of things that you need to keep in mind. One is that the credit bureaus aren’t actually making the decisions on the lending. As you point out, it’s the lender that makes the decision on whether or not they’re going to lend to someone. And so they actually all set their own criteria about what a good score is. Now, there are some generalizations we can make based on experience. What we’ve seen is that typically about a 750, 760 or higher would be considered an excellent credit score. And a really important thing to note there is that credit scores are actually viewed in ranges. So somebody that has a 760 would be considered about the same level of risk or the same level of credit worthy from a credit score perspective alone as someone who has an 860, even though there are 100 points difference there. So as far as the good score goes, I’d say 750 or 760 or higher and then four scores that cause concern. That’s pretty subjective because there are a number of lenders out there that are targeting people who may be in a credit rebuilding situation. So a lot of people will find lenders who will lend to them at just about any credit score. The concern would be what kind of interest rates they’re going to be charged for.

Roma [00:11:33] Next question is about fluctuating credit scores.

Submission [00:11:36] I use credit karma to track my credit every month. Recently, my credit score dropped by over 50 points from eight thirty to seven seventy three. Nothing changed in my spending or payment habits. I still pay off my credit cards in full every month, and my credit report doesn’t flag any issues with my accounts. I’m wondering why the month to month variations?

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Julie [00:11:57] Great question. And this is a really common one that comes up. So quick reminder that credit scores are calculated based on the information in one’s credit file at the time that the score is calculated. And most of us who use credit in Canada would have credit files at both of the major credit bureaus. Those would be Equifax and TransUnion. And so you might want to pay a bit of attention to where the data is coming from when you’re looking at a particular source. So in this case, the example was credit karma. That would be data from TransUnion. So they would want to make sure that they’re following their credit file at TransUnion to make sure everything looks good there. Of course, we should all be following our credit files at both Equifax and TransUnion to make sure everything looks accurate. So what happens with credit files is most lenders are sending account data to both the major credit bureaus on a monthly basis. So that means that maybe it’s on the 16th of the month that your Visa card tends to get reported. Maybe it’s the twenty third of the month that your MasterCard comes in, your car loan, maybe on the twenty seventh. And so every day there is the potential that your score is actually going up and down a bit because the data is constantly being updated in your credit file. And credit scores aren’t stored on credit files. They’re actually calculated on demand when they’re needed. So it’s very common for scores to fluctuate up and down. There are a number of different elements that could affect those fluctuations. One of the common ones is utilization. So that means the amount of a balance on something like a credit card or line of credit relative to the credit limit on that account. One common thing that we see is if somebody say books, a March break trip, so say they they book their travel. And of course, this would be in the before times when we used to do things like that. Someone books travel in February. They have a utilization that goes unusually high on their credit card. They pay it off in March. You might see a fluctuation there because that utilization jumps up, but you would tend to see that normalized fairly quickly and see that score value go back up again.

Roma [00:14:24] So the message there is sort of don’t worry about it. Here’s a common question that someone sent in.

Submission [00:14:29] If I cancel a credit card. Will that affect my score?

Julie [00:14:33] That is a very simple sounding question with a less than simple answer, which is a bit of a theme when it comes to credit scores. The reason is that it really depends on the credit profile of the individual. So you and I could do exactly the same thing. We could both cancel a credit card and maybe your score stays the same and there is a change in my score. Maybe my score would go down the next time it was calculated. The reason that it can be different for different people is that the other information in someone’s credit report at the time the score is calculated really plays a major factor in how much of an impact a particular action might have.

Rob [00:15:19] OK, I’m going to throw the next one at you, Julie. This goes back to utilization.

Submission [00:15:24] I’ve heard that a person should never use more than 30 percent of their credit limit of a credit card, for example, or else their score will drop. Is this true?

Julie [00:15:32] 30 percent would typically be a pretty low utilization. General rule of thumb is that, yes, lower utilization is generally better for credit scores. But again, the effect of the different elements in somebody’s credit file having an impact on whether or not a higher utilization will matter for somebody that plays a really big role. So if we imagine that your credit profile is like a boat and the longer and more solid your credit history is, meaning payments on time, good use of credit over time, responsible use of credit and nothing in collections, no bankruptcies that are still on the credit file, that type of thing that would put you in a bigger boat. You’ve got a bigger, more solid credit history. Somebody who has a newer credit history. So maybe it could be someone who’s younger and building their credit profile or someone who is new to Canada and building their credit profile. That person would be in a smaller boat. There is less of a credit history to back up their credit profile. And so any new event that comes along, so let’s say it is an increased utilization like that example of making a big payment for a trip. So putting a big charge on a credit card and so that utilization might spike. The person who’s in the bigger boat, the person with the longer, more solid credit history, is probably not going to see much of a blip if they see one at all with that, whereas the person with the shorter credit history or the credit history that has a few more negative items on it, they’re in the smaller boat. It’s a bigger wave. It’s going to impact the score calculation a little more,

Roma [00:17:26] Going to keep the questions coming.

Here’s another one.

Submission [00:17:27] What’s the best thing a 20 something year old can do to build a strong credit score?

Julie [00:17:32] The general advice is only open accounts that you actually need. You want to use your credit responsibly and pay your bills on time. That is the baseline advice for anybody. And I know that there’s often a lot of questions around how can you turn around a weak credit score, for example, if you’re looking to rebuild your credit and people are often looking for that quick fix, or what’s the big secret to getting a good credit score and keeping it? And I always want to remind people about the whole point of a credit score. Credit scores were initially designed to create an even playing field for anybody applying for credit. It was a consistent way of making sure that everybody gets treated fairly. And the whole point of a credit score is to predict the likelihood that an individual will pay their bills on time. That’s the information that a risk manager at a bank or a lender is looking for in addition to other information like the individual’s income and employment status and other things, of course. So the big secret to helping the prediction that you’ll pay your bills on time is to, in fact, pay your bills on time.

Rob [00:18:46] OK, Julie, next question.

Submission [00:18:47] Are the credit scores you can see for free from some financial Web sites, the same ones that lenders and landlords and others look at?

Julie [00:18:53] It’s important to remember, again, there are the two major credit bureaus in Canada, Equifax and TransUnion. I can only speak for Equifax because that’s where I work. So I can tell you that all of the Equifax scores that consumers can access in Canada in various sites. So whether that’s on a bank site or through some other reconsolidation sites, all of those scores are used by lenders and other entities that can legally access scores in Canada.

Rob [00:19:23] So just to clarify, if I got a really good score and I see it on a financial website, the lender who’s assessing me for a mortgage and they use Equifax, they’re going to see the same score?

Julie [00:19:34] It’s not quite that black and white. There are a number of different scores out there. So both the major credit bureaus. So multiple scores. I tend to use a clumsy analogy of ranch salad dressing, of all things. So if you imagine going into the grocery store, you’re looking to pick up a bottle of ranch salad dressing. You go to the salad dressing aisle, you’re probably going to see at least five or six different choices, slightly different brands. One of them maybe is going to have no salt and so on. It’s all intended to be the same thing. But if you look at the ingredients, generally the same ingredients, but potentially in a slightly different order, one might have a little more garlic and a little less of something else. The same idea applies with scores in the sense that there are different brands of scores and there are different versions of scores that are out there. And just like with the salad dressing where you might get a little more garlic in one, you might in one score have a bit of a heavier weight on one particular element of the credit file. So as an example, one score might give a little more weight to the number of credit cards that a person has relative to the number of overall credit accounts. There isn’t one score that’s more correct than another score. So what I want to highlight is that there will be a lender that uses that score that you see, but it might not be the lender that you are going to apply for that loan or credit card, whatever it is.

Roma [00:21:11] So let’s wrap up our time with you with some rapid fire questions. We’ll name a bunch of things and you tell us whether it factors into your credit score. First one, does government student debt factor in?

Julie [00:21:22] Some government student debt would be reported to credit bureaus and therefore appear on someone’s credit report, but not necessarily all of it. So the best thing to do is get a copy of your own credit reports from both the major credit bureaus, Equifax and TransUnion. And you can do that for free, an unlimited number of times in the year. And take a look to see whether or not your particular government loan showed up on your credit files.

Rob [00:21:48] How about student loans or credit from banks?

Julie [00:21:50] Those with more typically be reported to credit bureaus. So I would expect to see that type of line of credit showing up on somebody’s credit file.

Roma [00:21:59] How about cell phone bills?

Julie [00:22:00] Cell phone bills that are postpaid, meaning the type of plan where you use the phone and then they send you a bill for that month and you pay for it afterwards. Those ones are typically reported to credit bureaus. And the reason I’m making that distinction is that the prepaid or the pay as you go, that type of account wouldn’t be reported to credit bureaus. So you wouldn’t see that on your credit file.

Rob [00:22:24] What about utility bills like water, gas and hydro?

Julie [00:22:27] Those are not reported to credit bureaus.

Roma [00:22:31] Credit cards are an obvious one, but how about rent?

Julie [00:22:34] Generally, rent is not reported to credit bureaus. That is starting to change. There are some rent payments that are starting to get reported to the credit bureaus and therefore on individual’s credit files, which is something that we’re very interested in doing because we want to help everybody build a solid credit history, whether that’s someone who’s renting or someone who owns property and has a mortgage gym memberships, not unless it goes into collections. So you wouldn’t see an account for your gym membership showing up as just a regular item on your credit report. But if it went into a collection status, then it’s possible that the collections agency would start reporting that. And so you would see that in what’s called the public records section of your credit file, which is where that collections item would be visible.

Roma [00:23:30] What about car loans?

[00:23:31] Typically, yes. So the major loan providers, especially the banks, the I believe they’re called the captive car loans are reported. If you’re getting a car loan from a used car dealership that offers loans for people with bad credit or no credit, they may not be reporting to credit bureaus.

Roma [00:23:56] Awesome. Thank you, Julie. Some great information here about a topic that a lot of people are fixated on. But I think at the end of the day, Canadians are overthinking it. The most important thing about a credit score is to be a responsible borrower. Now, Rob, be honest. Do you check your credit score?

Rob [00:24:13] You know what? I don’t have to because I have a credit card account somewhere and every time I log in, my credit score is blaring there right in my face, probably too much. And then that goes back to you saying people are too fixated on it. Maybe it’s just too much in our face. Now, there’s a little information is good. Maybe we’ve got too much. I don’t know. What do you think?

Roma [00:24:29] I think that there’s been a huge amount of emphasis placed on credit scores/ That certainly wasn’t the case when I got my first credit card years ago. There’s no doubt that a credit score is an important thing. If you’re going to be getting a mortgage, if you’re going to be doing some borrowing, like perhaps to buy a car, you need to be aware of that. You need to plan ahead and make sure that it’s in good shape. But I think this kind of obsessing about whether it goes up and down, for example, my score went up 20 points from the last time I checked it. I haven’t made any substantial changes. It’s not something I’m going to worry about.

Rob [00:25:16] As always, we like to round out these episodes with our top takeaways. One, if you want a strong credit score. Pay what you owe on time all the time.

Two. Don’t sweat those moves up and down in your credit score, they often mean nothing to the people sizing you up for a mortgage or a loan. And three, you can improve a bad credit score. It all comes back to building a history of paying your debts and bills on time.

Roma [00:25:46] Thank you for listening to Stress Test, I’m Roma Luciw. And I’m Rob Carrick. This show is produced and edited by Amanda Cupido with mixing and editing by TK Matunda. Kiran Rana is the executive producer.

Roma [00:25:59] Special thanks to the people who read our credit score questions. Most are students from our producer Amanda Cupido’s Ryerson journalism podcasting class, Gracie Brison, Manuela Vega, Minh Truong, Vinney White, Boris Kurtzman and Michael Allen.

Rob [00:26:16] If you like what you heard, make sure to subscribe to the show or leave a review on Apple podcasts and thanks to everyone who has already left to review. We saw there were more than one hundred of you who posted throughout season one and we read each and every review. We appreciate it.

Roma [00:26:31] Leaving now to go check my credit score. See you later.

Rob [00:26:34] Bye for now.

Roma [00:26:52] This podcast was brought to you by CPP Investments as a member of the investment management industry. We’re committed to helping drive financial literacy among young Canadians, including providing information about our role in helping ensure the sustainability of the CPP. To learn more, visit CPP Investments dot com.