The 5 Most Important Lessons on Credit

When you apply for any financing, your credit score is one of the most important factors that a lender will assess before making a decision.

CIBC Visa Dividend Credit Card

Like many of you, my first credit card was opened under my mom’s main bank account as an authorized user: a dark red CIBC classic VISA credit card. I was headed off to college and needed a quick and easy way to expense my many instant noodle and coffee purchases to come. At the time, I didn’t realize what owning this card meant for me, but it was my initiation into building my financial future.

As I got older, I started hearing questions like “how’s your credit?” and “do you have good credit?” more and more often. I got the impression that credit was important, but I didn’t have a full grasp on what it was. What did having good credit entail? How do I increase my credit score? Where do I start? It was a very daunting and unfamiliar territory.

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Fast forward 10 years later, and I find myself working for a property-tech financial company, now somehow a subject matter expert on credit. I never thought I’d become specialized in the inner workings of the credit industry. A major part of my work is focused on educating consumers on what credit is and how it relates to financial success.

At the time, I didn’t realize what owning this [credit] card meant for me, but it was my initiation into building my financial future.

There’s a lot of financial jargon out there on credit. As someone who despises unpacking intangible concepts but adores layman’s terms, I found it quite difficult to fully understand and appreciate what credit was until much later in life. I’ve put together what I believe are the most important (and understandable) lessons on credit that you should take with you in life:

1. When it comes to your credit, always think in ratios. The amount of credit you have available compared to your maximum credit limit (aka your balance to limit ratio) plays a huge role in determining your credit score. Similarly, your monthly debt payments compared to your monthly income (aka your debt to income ratio) should be kept as low as possible; lenders want to see that you can manage your debts, but also have some disposable income left over once you have paid your bills.
2. Monitor your credit score monthly - I’d recommend visiting CreditKarma (completely free!) regularly to get an overview of your credit health. It’s rare that your credit score will fluctuate on a daily or weekly basis, unless you recently opened another credit account or paid off significant debts. Being aware of where you stand on the FICO scoring system can provide a visual for where you are excelling and where you need improvement. Through regular monitoring, you can also discover any alarming or fraudulent accounts that may need to be disputed.
3. Always ask a potential lender if they will be conducting a soft or a hard credit pull. Both credit pulls assess your credit risk; however, a soft pull is merely done for informational purposes (common with cell phone and internet providers) and does not affect your credit score, while a hard pull is done as part of a financial application process and almost always hurts your credit score (necessary for mortgage brokers). As a rule of thumb, if you’re 100% serious about obtaining whatever financing you’ve applied for, then it is worth the hard hit on your credit.
4. Having debt is not a bad thing, and we should normalize having debt. As of 2021, 42.9 million Americans owe a total of $1.57 trillion, each averaging $36,510 in federal loans; you are not alone. In fact, having debt actually presents a real opportunity to build your credit (which debt-free consumers do not have), as long as you manage your debts well. You can show creditors this by make all your debt payments on time, as this is imperative for credit success.
5. Credit card upgrade offers are not always a gimmick. Oftentimes, those notices you receive from banks and lenders in the mail are actually real opportunities to boost your credit either via an increase in credit limit and/or access to more points and rewards. Of course, you’ll always want to read the fine line but these upgrades are typically credit-boosting and not too different from what you already have.

Having debt actually presents a real opportunity to build your credit (which debt-free consumers do not have), as long as you manage your debts well.

Why is credit so important? When you apply for any financing, your credit score is one of the most important factors that a lender will assess before making a decision. The assumption is this: if you have good credit, you manage your debts and payments well, and can therefore be trusted to pay the lender back on time as well. In a perfect world, we would always maintain low balances and make all our debt payments on time every time. But sadly, most of us don’t have unlimited income. In reality, at some point, we all will have unpaid debts, missed payments, and maxed out credit cards.

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The silver lining? We live in a world that believes in second chances. If you don’t currently have great credit, it’s not too late to fix this. Educate yourself and understand why your credit is where it is. When a lender asks, be prepared to explain your situation and outline your efforts to improve your credit. Luckily, many lenders are moving beyond this traditional, rigid view of credit almightiness to consider other relevant factors like your income, your references, and even your integrity. It’s completely possible to get your dream credit card or even your dream home despite not having great credit, as long as you start taking the right steps today and can show your due diligence.

Luckily, many lenders are moving beyond this traditional, rigid view of credit almightiness to consider other relevant factors like your income, your references, and even your integrity.

Having good credit can unlock many doors for your financial future, but it’s not the the be-all and end-all and it doesn’t have to define you. After all, if I can evolve from a naïve student trying to understand something as intangible as credit to an expert on the topic, you absolutely can too.