Understanding Your Credit Score And How To Check It For Free
From budgeting, saving, investing, money management and anything in between, personal finances can be overwhelming when you’re just starting out.
One term you might hear thrown around is credit score.
You might have some of the same questions that I did on your credit score when I too started to actively look at improving my financial situation. What does your credit score actually mean? What factors determine your credit score? How do you check your credit score? Can you improve your credit score?
This post will touch on the following areas in relation to your credit score:
- What Is A Credit Score?
- Ranges Of Credit Scores & What’s A ‘Good’ Credit Score
- 5 Factors That Determine Your Credit Score (and What Doesn’t)
- Impact Of Your Credit Score & Benefits Of Monitoring It
- Borrowell – Free Credit Score and Monitoring For Canadians
- Credit Sesame – Free Credit Score and Monitoring For Americans
This post is the first in a new series on the blog called Fundamental Money Mondays. The goal of this series will be to introduce basic money topics and terms, outline the concepts and make recommendations on resources that can help you take control of that area of your finances.
With that in mind, let’s dive into credit scores.
What Is A Credit Score?
Essentially your credit score is a indicator of your financial health or creditworthiness. It gives potential lenders (or sources of credit) an indication of the risk you might present should they decide to borrow you money.
Obviously if a borrower is going to lend you money they want to know the likelihood of you repaying them back.
Your specific credit score is based on the information found in your credit report. What is a credit report? Your credit report is a summary of your financial history that includes how you pay your financial obligations and your borrowing activity.
Credit bureaus, like TransUnion, Equifax and Experian (not in Canada), receive information on individuals from financial institutions, credit card companies and any sources of credit. This would often include mortgages, loans, lines of credit, credit cards and other personal financial activity.
All of these details are stored in your credit report.
A calculation based on all that information is then made to determine your credit score for prospective lenders when reviewing your applications for credit.
Ranges Of Credit Scores
The range of credit scores differs depending on your location and the actual company sourcing that score or bureau providing the credit report information.
To simplify we will consider the general consensus and most often used ranges of credit scores in both the US and Canada.
In America, the most commonly used credit score is the FICO credit score and that ranges from 300 to 850. FICO is used by the vast majority of banks and credit lenders.
In Canada, the credit-reporting agencies Equifax and TransUnion use a scale of 300 to 900.
The higher the score the better.
It identifies a lower level of risk and higher likelihood of repaying borrowed money.
What Is A Good Credit Score?
Again we’re going to have to speak in wide-ranging generalities here given the differing reporting bureau ranges and credit score nuances.
Here are the broad ‘rule of thumb’ credit tiers.
- Excellent Credit: 750+ (US) | 780+ (Canada)
- Good/Very Good Credit: 700 – 749 (US) | 720 to 779 (Canada)
- Fair/Good Credit: 650 – 699 (US) | 650 – 719 (Canada)
- Poor/Average Credit: 600 – 649 (US & Canada)
- Bad Credit: 300 – 599 (US & Canada)
These tiers are not gospel. The subjective determination of the “good” or “bad” will depend on how the lender views it. A credit score of 750 or 850 in Canada isn’t very different in terms of the impact on your credit opportunities, interest rates or financial needs.
5 Factors That Determine Your Credit Score
The combination of the 5 factors below are what feed into the calculation to determine your credit score.
1.) Payment History (35%)
The largest determinant of your credit score is your payment history to lenders and creditors. Ultimately this showcases whether you are paying your bills, loans and money owed on time.
To improve or maintain a high credit score always pay the full installment (or amount owing) on time.
2.) Amount Owing & Credit Utilization (30%)
The second factor of your credit score comes from the total debt owing and your credit utilization. If you have $25,000 in total available credit and your amount owing always falls in the $20,000 range, you have a high credit utilization at 80%. A high utilization will negatively impact your credit score.
A rough guideline is to try and maintain lower than a 30% utilization. To improve or maintain a high credit score, try to manage that utilization rate and pay down your balances.
3.) Credit History Age (15%)
The third factor determining your credit score is related to the age of your credit accounts. This includes both the oldest credit account you have and the age of all your credit accounts. In the eyes of the bureaus and lenders, having “older” credit is better as it showcases a longstanding ability and experience of managing credit.
To improve or maintain a high credit score, it’s typically not a good idea to open several new accounts in a short time frame.
4.) Recent Credit Applications (10%)
When lenders (like banks and credit card companies) submit an application you’ve submitted for some form of credit, generally that requires a “hard pull” on your credit report. They’re sourcing your credit report to determine whether they want to lend you credit. Several inquiries in a short time frame can hurt your credit score.
5.) Credit Types Used (10%)
The final factor determining your credit score is the type of credit accounts you have. There are two basic types of accounts: revolving accounts and installment loans. Within those accounts there are different assets, like cars, homes, credit cards, student loans, personal loans, etc.
The more diverse your credit accounts are, the better it can be for your credit score. It shows an ability to manage a wide-range of credit types. However, this only represents 10% of your credit score so don’t stress about not having different assets represented.
Factors That DON’T Determine Your Credit Score
Your age, marital status, bank account balances, employment status, level of income, cell phone bills and checking your own credit report DO NOT impact your credit score.
Impact Of Your Credit Score
So we’ve determined what a credit score is, where the broad tiers of scores range and the factors that do and don’t determine our credit score. So what does this actually mean and what is the real-world impact of your credit score?
Your credit score will play a role in your overall financial journey. From the ability to even access credit and then the opportunity to receive that credit at the most optimal interest rates.
A high credit score can save you hundreds of thousands of dollars in interest over your life.
Here are just some examples of how your credit score impacts your life.
- Prospective employers might run a credit check against your records as part of the hiring process.
- Landlords are more frequently running credit checks for renters before signing lease agreements.
- Mortgage lenders will use your credit score to determine both eligibility to access credit and also the interest rate you receive.
- Car dealerships and private financing will do the same as mortgage lenders before you can purchase a vehicle or be eligible for specific financing rates.
- Credit card companies will review your credit score as part of the application before giving you access to their products.
- Financial institutions will use your credit score as a determinant for personal loans, lines of credits, business loans and other products or services they offer.
These are only a few examples of how your credit score will factor into your everyday life. Monitoring and maintaining a high credit score will help make your financial journey as cost-efficient as possible.
Benefits Of Monitoring Your Credit Score
The ability to access credit and receive optimal credit rates are the net positives of having a high credit score.
There are also benefits of monitoring your credit score and report as part of your general financial upkeep system.
- Improving your credit score is much easier when you’re actively monitoring your credit score and the different areas of your report.
- Refinancing or adjusting credit becomes an opportunity as your credit improves. You might qualify for lower interest rates on your mortgage, student loans or personal loans. Monitoring your credit score ensures you have a holistic understanding of your current financial situation.
- Avoiding fraud in this digital age of identity theft and security breaches is key. Monitoring your credit score ensures you can identify any fraud issues on your credit report as soon as possible.
Thankfully, there are great online providers for both Americans and Canadians that allow us to monitor our credit reports to reap these benefits for free.
Borrowell – Free Credit Score And Report Sourcing And Monitoring For Canadians
In similar fashion to Credit Sesame for Americans, Borrowell is a platform that gives Canadians free access to their credit score and report plus credit monitoring.
Just like Credit Sesame, you won’t need to enter any credit card information or only have limited-time free access. This is a 100% legit service.
Borrowell The Company
Borrowell is a 100% Canadian company that was founded in 2014 and one of Canada’s largest online lenders. In addition to their free credit score and reporting service, they offer personal loans at low interest rates to Canadians.
As stated on their website, their goal is: to help Canadians make great decisions about credit. Our job is to empower you by providing the tools you need to improve your credit score and save money.
Borrowell has served over 500,000 Canadians with their free credit score and report service.
Security On Borrowell
Security and data protection is noted throughout the Borrowell website and during the registration process.
According to their website, Borrowell uses bank level encryption to secure the transmission of data. They will not sell or rent your personal information to 3rd parties for any purpose.
Services Included For Free With Borrowell
As mentioned in the initial introduction, a free Borrowell account gives Canadians access to their credit score and reports.
Your Borrowell account will provide you:
- Free credit score based on the Equifax proprietary model
- Free credit report monthly from Equifax
- Finance tips to improve your score
Similar to Credit Sesame, Borrowell also shares recommended financial products, including loans and credit cards. These recommendations are based on your credit score and seek to help you save money or best align with your financial situation.
Sign Up To Borrowell For Free
Signing up for Borrowell is quick and easy. It takes less than 2 minutes, doesn’t require a credit card and is entirely free.
If you’re a fellow Canadian that wants to stay on top of your credit score and monitor your credit activity, this is a great service.
Credit Sesame – Free Credit Score And Report Sourcing And Monitoring For Americans
Credit Sesame is a free service that allows people within the United States to get a free monthly score, free credit monitoring and even $50,000 of free identity theft insurance.
Yes, that’s all included within the Basic account at Credit Sesame. You won’t be required to enter your credit card information or only have limited-time free access. This is a 100% legit service that is reputable and well-respected.
Credit Sesame The Company
Credit Sesame was launched in 2010 and their current company HQ resides in Mountain View, CA.
Their current membership totals over 8 million sign ups and they’ve received over $42 million in funding from investors.
Security On Credit Sesame
Credit Sesame has ‘secure status’ from Norton, McAfee and ETrust, as well as accreditation from the Better Business Bureau.
No financial institution or online business is 100% vaulted in this digital hacking age but Credit Sesame has all the necessary stamps of approval.
As part of the sign-up process, Credit Sesame will ask you for the final 4-digits of your Social Security Number, not the full number. This is another feature to help confirm your identity and protect your information.
Services Included For Free With Credit Sesame
As mentioned above, your free account will give you everything you need to check and monitor your credit.
You Credit Sesame account provides you:
- Free monthly TransUnion VantageScore credit score
- Free credit monitoring
- $50K in free identity theft insurance
The Credit Sesame platform also shares recommended financial products, including loans and credit cards. These recommendations are based on your credit score and seek to help you save money or best align you with potential mortgages, car loans, personal loans, student loans and credit cards.
Credit Sesame also has paid offerings should you be interested in upgrading to some of their other services. These includes daily credit score updates, credit reports from all 3 credit bureaus, $1 million identity theft insurance and other monitoring/security services.
Sign Up To Credit Sesame For Free
Signing up for Credit Sesame takes 60 – 90 seconds, doesn’t require a credit card and is entirely free.
If you want to stay on top of your credit score, monitor your credit activity and also get free ID theft insurance, this is a great service.
Unfortunately Credit Sesame is only available for Americans. However, there is another great service available to Canadians for free.
IN CLOSING…UNDERSTANDING YOUR CREDIT SCORE & CHECKING IT FOR FREE
Your credit score isn’t the end all and be all of your financial life. However, it will play a role in your money journey as we discussed in the sections above.
If it’s low, don’t be disheartened. The five factors we noted that impact your credit score can be managed and better controlled. If you actively look to improve your financial situation that number will naturally progress upwards.
Credit Sesame and Borrowell are great free tools to add to your overall money management system. Tracking and monitoring your credit activity is a small step in ensuring you take control of your money and life.
Here are some other posts that can help you take control of your money and life.
- Borrowell Review – Free Credit Score And Report Service For Canadians
- 89 Personal Finance Tips – Budget, Save, Make, Invest & Better Manage Your Money
- 15 Smart Money Moves You Can (Easily) Make This Month
- How To Make $1,000 Quick: 9+ Fast Ways To Earn Money When You Need It
- 35+ Rewarding Side Hustles That Almost Anyone Can Do To Earn More Money
- 17+ Of The Best Free Money Apps To Get Cash Back, Make Money, Save Money & Invest