“What is Credit?” And Other Common Questions | Refresh Financial
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“What is Credit?” And Other Common Questions

What is a Credit Score and why is it so Important?

What is credit?

What is credit anyways? If you’re unsure, you’re in good company. Not understanding the ins and outs of credit is very common, and 56% of Canadians have never checked their credit score at all.

If you’ve asked your friends how credit works, you’ve likely you’ve received a few conflicting responses. Let’s take a look at what credit is, why it’s important, and how it works!

Learn how your credit works before you start increasing it

If you’ve made a goal to start working towards a higher credit score, then the first step you’re going to want to take, is to familiarize yourself with how credit works. A healthy understanding of credit will enable to you boost your score in the most efficient and cost-effective ways possible.

The majority of Canadians are relatively uncertain when it comes to the topic of credit. 88% are unaware that an employer can check their score, 60% didn’t know a landlord might check during the application process, and nearly two-thirds of Canadians had no idea that their cell phone providers or insurance agencies can check their score, too.

Let’s go through and answer some of the most common questions Canadians have regarding credit!

1. What is the definition of a credit score?

Your credit score represents your reliability as a borrower. The score is between 300 and 900 and the higher your score is the better. When you consistently repay your debts in full and on time, (just like the Lannister’s) you will develop a higher credit score, and a lower score will reflect a poor payment history. Trying to borrow money with a damaged score can be difficult or even impossible.

2. Will paying off an outstanding balance instantly increase my credit score?

You may find this surprising, but the short answer is no. If you have an outstanding balance, it could be reporting as a derogatory mark against you. This is a bad thing, as every negative mark on your score will drag that number down. Unless these are cleared and paid off, these negative scores can remain on your credit report for up to six years.

3. When should I start building credit?

Immediately! The good news is, it’s never too late to start building your credit. If you have a few negative reports on your score, you can either start adding positive trade lines to reverse that damage or begin to faithfully make payments towards those things you’ve been ignoring. Over time, these ‘bad’ items on your report will have less and less of an impact.

Read our blog “4 Tips That Will Increase Your Credit Score Overnight

4. How can a young person build credit?

It’s difficult to build credit when you’re starting out because you won’t have any score for lenders to assess you. It can feel like a catch-22 situation… How do you build credit when no one trusts you with the opportunity to borrow? Luckily, there are a few ways around this dilemma.

Making use of products geared towards students, as well as secured credit products are options that are open to young people and are super effective in building credit.

Click here for more info on credit trouble most Millennials experience, read our blog “Why Millennials Have Trouble Building Credit”.

5. Does it hurt your credit to check your credit score?

No. Checking your own score is considered a ‘soft’ inquiry, which has no bearing on your report. Now, if a potential lender checks your score, it’s considered a ‘hard’ inquiry and it will have a negative impact on your credit score.

6. Should I close my unused credit cards?

That depends on two factors:

  1.   Is your usage percentage too high if you eliminate one of your cards? Your usage percentage is the amount of credit you have used versus the amount available to you. For instance, let’s say you have two cards each with $5000 limits. On one card you have no balance, but on the other, you have a $3000 balance. This means that you’re using $3000 of a $10,000 combined limit. Your credit usage is 30%. If you close the card that has no balance, you are removing $5000 off your total limit. All of a sudden, you’re usage percentage jumps to 60%. You’ve doubled your usage percentage without spending a penny. You want your usage percentage to remain below 30% for the best results on your credit score.
  2.  If the card you’re thinking of getting rid of is the oldest account you have to your name, or you’ve had it for any length of time, then closing it lower your average account age. This can have a negative effect on your credit score. You can read more about this post here: How Many Credit Cards Are Too Many?

7. How does co-signing a loan build credit?

If you are the co-signer, your credit can be built if the person you’ve co-signed for makes their payments on-time payments and in full. The payments will be reported to the credit bureau as though this was your debt. If you are the one being co-signed for, your regular and on-time payments will be reported to the credit bureau as if they were for a regular loan with no co-signer.

8. What’s the best way to build credit fast?

Designated credit building programs are by far the fastest way to build credit. A secured savings loan reports like a traditional loan to the credit bureau but does not require a credit check. In addition to a credit building program, it’s also important to start paying off any existing debt that you have and ensuring that you make every payment on time.

There are several steps we can take right now to build our credit. Read our blog, “How to Build Your Credit Fast”.

If you’re encouraged to continue reading through these blog posts, you’ll be a credit-building pro in no time!

What are some of your credit related questions? Let us know in

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I’ve done pay day loans in the past but didn’t know a whole lot about credit until recently. So I checked into my credit score. I was very disappointed to find that I had a 0 credit score as I have never had or needed any credit cards or lines of credit. I knew I wanted to buy the house I live in so I knew work was needed, but I never thought it would be as easy as purchasing REFRESH!!! I bought it in June of this year, waited or 2 months and was approved for my first credit card. I was so excited. It gets better!!! Then I waited 5 months, and would you believe it. Only 5 months after purchasing refresh my credit score was strong enough to finally get approved for my first brand new car with no down payment, low biweekly payments, no cosigner, and no car trade in. My bank also tells me if everything stays good I will own my home within a year. After years of thinking there was no hope I am only months away from owning my home. THANKS REFRESH!!!! Please share this story with everyone you can! ”

Emily, Truro, NS