Does your credit score really matter?

Like most questions in personal finance, this one has a short answer, a much longer answer and in the end it really just depends.

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Man and his dog, sitting on the couch, checking his credit score.

To kick things off with the short answer, yes, your credit score matters — but there are some pretty big caveats here.

When it comes to using your money to live the life you want, your credit score is only one piece of the puzzle. While it’s important to know your score, it’s just as important to understand how much it matters and what you can actually do about it.

If you skip those steps, you might end up spending way too much time and mental energy on something that yes, does matter, but maybe not as much as you think.

What is a credit score?

Your credit score is a three-digit number between 300 and 900, calculated by one of the major credit bureaus. Here in Canada, that’s Equifax or TransUnion.

While the exact calculations vary based on the provider, typically your score is trying to turn these factors into a single number:

• How well do you repay your debts?
• How long of a track record do you have repaying those debts?
• How much of your available credit are you currently using? This is typically a percentage, so if you’re carrying a $2,000 balance on a card with a $10,000 credit limit, you’d be using 20% of your credit.
• Are you applying for new debt frequently?
• How many types of debt have you had?

How is your score used?

Essentially, your score is designed as a predictor of how likely you are to pay back debt. That’s why companies check it when you’re applying to take on new debt, like a credit card, mortgage or car loan.

But it’s also used as a proxy for other commitments involving money that we don’t typically think of as “debt,” like renting an apartment or signing a two-year cellphone contract. Some employers will even check your score as part of the hiring process or security screening. And in some provinces, insurance companies can use your score to help set your auto insurance premium.

So yes, your score does have real-life impacts, even if it’s a number calculated behind closed doors.

Your score matters a lot if you don’t have one

I was the queen of Not Using Credit during university, mostly because no one would give me a credit card when I got to campus with no income and no credit history. (To be clear, this was a good and smart decision on behalf of the credit card companies!)

I had already graduated by the time I signed up for my first credit card, and I was starting from scratch. When you have no credit score, you’re pretty much at the mercy of whatever your regular bank will let you sign up for, so I rocked a cool $500 credit limit to build my credit history for the first year.

If you want to book a $5,000 vacation on a premium credit card to get the reward points, you can’t just walk in with no score. Same goes for taking out a mortgage or securing a car loan — and if you do find a lender who will make it work, it’s probably not at a competitive interest rate.

So yes, going from “no score” to “a score” really, really matters if you want to do those things. And even beyond that, other improvements might matter, too.

Good vs. bad matters, good vs. great mostly doesn’t

The long and short of it is that yes, a bad credit score (or no credit score) can prevent you from doing the things you want to do. That’s why credit scores matter.

But for most of us, that’s the level we need to worry about: Is my score bad, good or average?

Going from bad to average, or even bad to good, can unlock a lot of things you might want to do over the next few years, from buying a great house to securing a car loan. Those things can be hard if you have a truly bad score.

But going from good to great will probably only have a marginal impact on your life, if any. My husband’s score is routinely 30 points higher than mine, but I’ve never received worse rates or fewer opportunities.

That’s why I don’t really care that my score isn’t perfect, since I know (from checking it through an online service for free every so often) that it’s good.

Your credit score matters — but don’t overthink it

It’s safe to say that someday you won’t be able to get the thing you want, like scoring a low mortgage rate for your house, without debt of some kind. There might also be times when it’s a smarter strategy to hold on to cash by financing your cellphone or car instead.

In those cases, your credit score does matter.

However, the best things you can do for your credit score are basics that are good to do anyways. Outside of checking your score regularly, you should: pay back your debt on time, try to pay it off if you can and build up a longer credit history (including keeping your oldest accounts open if you’re new to building credit!)

And then focus your time and energy on more important things.