Decoding credit scores: facts vs. myths

In this episode of the perspectives podcast, Laura Scheck, Vice President of Credit Cards at Scotiabank, talks about credit scores and how they impact our financial lives. The episode dives into the basics like what it is and how it’s calculated, but she also debunks some credit scores myths. Listen to this episode if you want to know how to check, build, and improve your credit score.

Click here for the transcript.

1. Pay your bills on time, every time. Late payments can significantly impact your credit score negatively, so it's important to pay all your bills on time.
2. Keep your credit card balances low. Your credit utilization ratio is another important factor that affects your credit score. Try to keep your balances low and avoid maxing out your credit cards.
3. Monitor your credit report regularly. Try to check your credit report periodically to ensure that all information is accurate and up to date. You can request a free credit report from each of the credit bureaus (Transunion and Equifax) once a year.
4. Limit your credit applications. Each time you apply for credit, a hard inquiry is placed on your credit report, which can negatively impact your credit score. Try to limit the number of credit applications you submit.
5. Build a diverse credit history. Having a mix of different types of credit, such as credit cards, loans, and mortgages, can help improve your credit score. However, don't apply for new credit just to diversify your credit history.
6. Consider a secured credit card. If you're struggling to get approved for a regular credit card, a secured credit card can help you build credit. With a secured credit card, you'll need to put down a security deposit, which will become your credit limit.
7. Don't close credit accounts unnecessarily. In some cases, closing some credit accounts can negatively impact your credit score, so think twice before closing an account, especially if it's your oldest one.

Key moments in this episode:

1:24 — The “origin story” of the credit score
2:06 — What is a good credit score?
2:27 — Can you get a perfect credit score?
3:02 — How is a credit score calculated?
3:32 — Five main factors that impact credit scores
4:30 — The most common way to negatively impact your credit score
5:50 — Another common way people unknowingly decrease their score
7:04 — Can checking your own credit score negatively impact it?
8:33 — Is using your full credit card limit a bad thing for your credit score?
9:34 — Will taking a higher credit limit on your credit card affect your credit score?
10:31 — What are some ways to improve your credit score and how quickly can it be done?
11:36 — The best way for newcomers or students to build their credit
12:52 — Have attitudes changed from generation to generation when it comes to credit?
13:40 — The biggest shift in the current credit landscape that Laura has noticed
14:52 — The biggest takeaways when it comes to credit scores

Transcript:

Stephen Meurice: For many people the credit score is this shadowy number keeping tabs on all our financial transactions. What’s a good number? What’s a bad one? How’d they even come up with it? But this thing few of us give much thought to, it can have a huge impact.

Laura Scheck: It's true. Credit score is something that is so important to your life and people don’t often think about it.

Stephen Meurice: That’s our guest today, Laura Scheck. 

Laura Scheck: But it is really influential especially as an adult if you’re trying to get credit cards, figure out mortgages, car loans, any of those pieces. So, it is good to talk about it and it's really good to understand.

Stephen Meurice: Laura is Vice President of Credit Cards at Scotiabank and she’s here to help us do just that, understand the credit score. This episode you’ll hear her speak with Natalie Nanowski from our Perspectives newsroom team. 

They’ll bust some common myths as well as explain the basics. What number is good, what’s bad, what will actually decrease your score and of course tips on how to improve it.  Because de-mystifying your credit score can be a powerful thing.

Laura Scheck: You know, people will deem, ‘Are you credit worthy or not?’ It feels like a judgment. But you are in control of your credit score. You can monitor it. You can take actions to keep it healthy. 

And to the extent that you do that, it feels like a much more empowered position over your own financial health. 

Stephen Meurice: I’m Stephen Meurice and this is Perspectives. Now, here’s Natalie Nanowksi.

Natalie Nanowski: Laura, thanks so much for joining us today.

Laura Scheck: Oh, great to be with you.

Natalie Nanowski: All right, let's jump right into it. So give us a little bit of a rundown, what is the history behind credit scores?

Laura Scheck: The origin story.

Natalie Nanowski: Yeah. [laughs]

Laura Scheck: Of the credit score. Yes? The one that we know today started in 1989. It started out of the US by a company called Fair, Isaac and Company. Got truncated and now everyone just calls it a FICO score. 

And it was a way for banks and other lenders to understand a little bit more about their customers and standardize the process for how they assess lending the money. That's really what it comes down to. 

And really what it's doing is trying to understand your history of borrowing money and paying it back and how you do that. That's all. The bank sees that information then to figure out how to lend you money, how much, things like that.

Natalie Nanowski: Okay. And remind me again, what is a good credit score? Because I know it goes from like 300 to 900.

Laura Scheck: Good credit score is somewhere between 720, 780. A really good credit score is in the 800s. Most Canadian lenders will be able to lend money out around 660, but not a firm rule.

Natalie Nanowski: Okay. Is it possible at all to get that mythical, magical 900 number, or is it a unicorn?

Laura Scheck: Technically, I'm sure anything is possible, which is why they have it as the ceiling. It’s probably pretty difficult to achieve. I think anyone who can get into the 800s of a credit score can feel really good about their credit. 

The mid 700s is still really, really good. But a lot goes into the score. I don't think you can manage it that precisely as other parts of your finance. So just having a healthy score is great.

Natalie Nanowski: Okay.

Laura Scheck: You look like you're about to ask me how we get to those numbers, and that is a good question, I think, since statisticians are pulling all sorts of different information together and using it.

Natalie Nanowski: It does seem just like a bunch of random different numbers. How are they calculated?

Laura Scheck: None of us have the exact information. It's a proprietary mathematical statistical formula that is being used and the FICO company owns that. Safe to say it's pulling in lots of different information from other sources and coming together to create a number that is standardized. 

So the same math applies to everybody. What the math is exactly is a little bit tricky, but we know that there are five main factors that we can talk about that will help explain what is impacting your score, up or down.

Natalie Nanowski: Okay so what are these five things?

Laura Scheck: So the first really is just looking at your behaviour and payment history. Are you paying on time? Are you paying at the right time? And are you making your minimum payments? It also looks at how you're using the credit that you have. If you have maybe a $10,000 loan on a credit card, are you always at that $10,000 mark or do you have a little bit of room to borrow a little bit more? 

It looks at your history over time. So credit score is a living, breathing number. It changes more than once a month based on new information. So it looks at the trajectory maybe of how you've been doing over a long time. It looks at your new loans or how often you're applying for a new loan. 

The more you're applying, it's sort of wondering why you continue to need so much more money and that factors in. And then the last thing is the type of credit that you have, so the mix of products. Do you have ten credit cards? Do you have two credit cards and a mortgage? And what does your behavior look like on those different products?

Natalie Nanowski: So you kind of touched on it there. In regards to what impacts your credit score, what can negatively impact your credit score?

Laura Scheck: I think the things people do most often is applying for a lot of products at the same time. So if you decide you need a new credit card, the one you have is not suiting your needs ̶ maybe it's a low-rate card and instead you want to start collecting points and earning points to redeem for a vacation or groceries or anything fun ̶ don't apply for a similar card at all of the banks and then decide to choose which one you get first. 

That would cause a lot of checking of your credit score and that would cause a little bit of a reduction in it.

Natalie Nanowski: Why is that a bad thing? What are lenders seeing?

Laura Scheck: They're seeing someone who is really hungry, or it appears that they're really hungry for credit. And so they're applying a ton of different places to get as many different cards and as big a credit limit as possible. 

That signals that you might be in financial trouble. If you're doing one check for one credit card because you want to change loyalty programs or you need cash back rewards instead of Scene+ points. That would be something that happens from time to time with customers. 

If you suddenly apply for ten cards and you're trying to get hundreds of thousands of dollars of credit from multiple different lenders, that raises a red flag.

Natalie Nanowski: Okay, so do a little bit of research beforehand to figure out exactly which credit card you want.

Laura Scheck: Exactly. And it makes sense. There are so many cards in the market, you should spend a little bit of time to figure out where do you spend? How do you want to use rewards? What kind of card will let you do that the best? And are there are other perks as well?

Natalie Nanowski: Okay.

Laura Scheck: Another thing people do is confuse making a full payment once in a while and thinking that is better than making your minimum payment consistently. So, it is better if you can pay your full bill at once, you should absolutely do that. 

If you can't, you can break it up and pay your minimum payment every month to be consistent. And that helps again build understanding of how you're going to pay and when you're going to pay and living up to the commitments. 

Some people think, ‘Oh, I can't afford even my minimum balance this month, so I'll just wait, and I'll work with my finances, and I will pay the full balance next month and that will be more money and that will be good for the bank or the lender.’ It is better to try and figure out how to do a minimum every single time.

Natalie Nanowski: Okay, so it’s better to make a minimum payment each and every month on your credit card rather than, let's just say, letting a month pass and paying the full thing two months down the line when you can afford it.

Laura Scheck: Exactly. So if you have the money to pay your full balance, of course you should do that. If you don't and you think, “Should I make no payment this month and save money to pay the whole thing next month?” That would hurt your credit score. It would be better, if you have to make a choice, to continue to pay the minimum every month to build the consistency. Consistency is key.

Natalie Nanowski: Okay. And are there any myths you've heard over and over about credit scores that you'd like to kind of dispel?

Laura Scheck: I think one of the ones is that if you personally are checking your credit score all the time, it's going to go down. And it won't. So in the Scotiabank app, as an example, you can go and check your credit score any time you want. It does not impact your score. It's actually a great tool to stay educated. 

There are two different ways to look at the score. It'll show you good, bad, excellent, not good. Has it been going up or down over time. And what is it specifically that's causing that? So that's great to learn. It will help you get specific recommendations for yourself. 

And then there's another page which shows every single thing that you have ever done [laughs] with your credit score. So I can look back and see things from many years ago, cards that I have closed, but I paid off successfully. I can see some mortgages and some car loans, and it's really interesting to keep track, even for yourself, to see how you've been doing.

Natalie Nanowski: Okay, so it's kind of important to keep an eye on your credit score.

Laura Scheck: I think so. It's a great health check. Make sure your credit is good. It also helps you if something is a little bit funny. So let's say unfortunately that there's a fraud event. Someone takes out a credit card in your name that you didn't know about.

Natalie Nanowski: Not good.

LS: Not good. If they take it and they don't pay it back, you will be able to see that in your credit report that there's a new card that's been opened ̶ no, it's not you ̶ and be able to call the bank to have it cancelled sooner.

Natalie Nanowski: Mmm hmm, so I’m looking to get some more clarification on something that I think comes up often for people. Let's just say someone has a credit card with a $5,000 limit. Is it good to only use a certain amount of that credit card or is it okay to sometimes use the full $5,000 on something that month?

Laura Scheck: Your credit score looks at all of the lending that you have in the market. So let's say you have that $5,000 limit, if you use that complete $5,000 limit on that one card, but there's room on the other cards that you may have in your wallet, it probably will be fine. 

If you are using all of your limits on all of your credit cards, that will start to impact your score. So I think there is a myth that people hold on to that getting to 50% of your credit limit is that right place to try and be. 

That isn't necessarily true, depending on how many cards you have. It's more about using what you need, paying it down as quickly as you can, and sometimes there are more purchases you need to make in a month and things can fluctuate a little bit. I think that that's okay, but being at the top end of your credit limit all of the time would be more damaging to your score.

Natalie Nanowski: And how about when the bank reaches out to you saying that we have now pre-approved you for a higher credit limit. Should you go ahead and accept that higher limit? Or is it better for your credit score to keep a lower limit?

Laura Scheck: It depends on what you're going to do with the limit. So if you can accept the limit and have it for when you need it and know that if you spend up to the limit or close to and you can pay it back down, it might be helpful for your finances. 

If you know that you are an impulse purchaser and maybe you'll see that as extra free money that you could use for something, you may want to shy away from it. What's nice is that the banks will always ask you if you want the increase. 

They just won't automatically apply it to your account so you can maintain control of your spending, your finances and help impact your credit score that way, too.

Natalie Nanowski: So it's really a personal decision.

Laura Scheck: Totally. It’s almost like building a relationship with the banks. Like, ‘You've given me money, I promise to pay you back.’ And just repeating that cycle, like any relationship, it's good to be consistent over time.

Natalie Nanowski: Okay, so let's just say someone has a bad relationship with their credit. [laughs] They haven't made some payments on time, maybe took out more credit than they actually should have. What are some of the ways they can improve their credit score and how quickly can they do it?

Laura Scheck: I think improving your credit score is something that comes a little bit at a time. It's really easy to make your credit score go down pretty quickly. It's a little harder to build it back up. And so I think there are a few different things. 

If you have lots of different products, figure out the ones where you can make the best, most consistent payments and pay those off first. Make sure that you're making minimum payments or the expected payment on all the different products that you have in your portfolio. 

I think it's also really important if you're having trouble and you know that you've hit a rough patch and you may not be able to repay a loan to the terms it was given to contact your bank and oftentimes there are programs to help customers find a way to either potentially reduce an interest rate or find an alternate schedule for payback. And sometimes raising your hand and asking for help that way actually has the best result.

Natalie Nanowski: So something that people I don't think really know is that when you come to Canada, you have no credit score, even if you're in the U.S. where they use a similar system. When you come here, that doesn't necessarily transfer over. So you're starting from zero. So if you're a newcomer or if you're, let's just say, a student and you want to build up your credit, what is the best way to do that?

Laura Scheck: It's interesting you ask because I’ll talk about students and maybe new to the country a little bit differently. If you're a student, banks have great programs tailored for students understanding that you have no credit history. 

So you go in and you can open a banking account and a credit card. Your credit limit will be a little bit lower. But it's a great way to start the relationship, build the trust and show that you can use that credit well over time. 

And then as you age and mature, get more income, go off to school, your credit limit can be adjusted for you, and that helps build your credit bureau score. If you're new to the country, there are similar programs that Scotiabank has, in particular, or some of the others too, where you can come in and you'll be given a credit limit and a credit card. 

Again, so you can start the process of showing how you spend and pay that balance off. And then again, over time, it builds the history and the patterns that everyone wants to see to feel comfortable extending more credit.

Natalie Nanowski: And how long does that generally take? Is it a year process?

Laura Scheck: It depends on the person and depends on the bank. But I'm going to say within a couple of years, usually in good shape.

Natalie Nanowski: Okay. And let's talk a little bit about some of the attitudes and advice around credit and credit scores or even debt. Has that changed from generation to generation?

Laura Scheck: A little bit, I think. So in Gen Z, we are seeing a lot more people who are interested in debit cards versus credit cards (want to avoid debt), are interested in having the money and then being able to spend it and keep track of their budget really closely. 

What will be interesting, and we always see this, is as generations tend to get a little bit older, you become a little bit more comfortable with debt just as a facility of your life. [laugh] 

You need a little bit to sometimes lay out a little bit to maybe get a car or buy a house or put a down payment for renting an apartment. So I think people become more comfortable over time. 

But I think the big shift in the landscape right now is seeing people more interested in installment loans and installment purchases. So you could go and make a purchase, buy something a little bit of a stretch maybe that you didn't think you were going to need to buy like a new fridge if your fridge breaks. 

Or maybe there's a really special occasion and need to spend a little bit more than you thought you might for, I don't know, a bridesmaid's dress for a wedding. Something I've had to do a lot. 

You can take that purchase, and instead of having to pay it all at once, you can break it up into installments. And that helps lessen the load. You still are paying it back in a short amount of time. You can still budget around the amount and it's more of a short-term microloan than a big project loan that you might need.

Natalie Nanowski: And those micro loans still impact your credit score, right?

Laura Scheck: Still impact your credit score. Definitely. The nice thing is the ones that are offered by Scotiabank don't extend any more credit than you already have. So they live off the back of your credit card. 

So you're not doing a new check with the bureau, with a new lender. It just lives under the umbrella of what the bank has already agreed to lend you. And then also just makes it easy to pay back because it gets put into your credit card bill.

Natalie Nanowski: Right. And those who are just sticking to their debit cards, I mean, they're not really getting a credit score because they're just using the money they have. Right?

Laura Scheck: Exactly. And perhaps missing an opportunity to be earning rewards.

Natalie Nanowski: All right. As we wrap up here, what are some of the big lessons or takeaways that you would like people to hold on to when they think about credit scores?

Laura Scheck: First thing, remember that it is a living, breathing number. It changes all the time. And so a credit score you think you had five years ago might be a lot better or even a little bit worse than it was today. So keeping tabs on that. 

And then also feeling in control of your credit score. You know, people will deem, ‘Are you credit worthy or not?’ It feels like a judgment, but you are in control of your credit score. You can monitor it. You can take actions to keep it healthy. And to the extent that you do that, it feels like a much more empowered position over your own financial health.

Natalie Nanowski: All right, Laura, thanks so much for joining us today and breaking down some myths about the credit score.

Laura Scheck: Thanks for having me.

Natalie Nanowski: I've been speaking with Laura Scheck, Vice President of Credit Cards at Scotiabank. The Perspectives podcast is made by me, Natalie Nanowski, Stephen Meurice, Armina Ligaya and our producer Andrew Norton, who claims to have a 950 credit score, even though we just did an interview on it and we know that's not possible.