What is a “Credit Score”?
A credit score indicates the risk you represent for lenders, compared with other consumers.
|CREDIT SCORE STANDING|
|670-699||Need a closer look|
|-585||No credit / limited credit history|
There are many different ways of calculating credit scores. Two major Canadian credit reporting agencies, Equifax and TransUnion, use a scale from 300 to 900, with most Canadians hovering around the 700 mark. The higher your score, the lower the risk for the lender. Anything below 600 will cause lenders to take a closer, more skeptical look at you as a possible credit risk. However, their scores are only for information purposes to the general public. They should not be used for applying new credits, mortgages, or loans. The reason is other lenders and banks have their own ways of calculating credit scores. With your consent, lenders and banks can access your financial information from Equifax and/or TransUnion, but they arrive at your credit score differently. As well, lenders and banks may have additional information about your finance that is not recorded by credit-reporting agencies but is shared internally among other lenders and banks.
Upon arriving at a credit score, lenders will decide how much money you can borrow from them and what interest rate you will pay.
How is Your Credit Score Calculated?
|CREDIT SCORE BREAKDOWN|
|Score are calculated using a formula similar to this:|
Late payments, past due accounts, wage attachments, collections, bankruptcies
Amount owed on accounts, proportion of balances to total credit limits
|Length of Credit History
Time since accounts opened, time since account activity
Number of recent credit inquiries, number of recently opened accounts
|Types of Credits
Number of various types of accounts (credit cards, loans, mortgages)
Credit-reporting agencies and lenders use formulae to figure out your credit score. The formulae take into account various factors described in your credit report, such as:
- Do you tend to carry over a balance on your credit card from month to month?
- How freqent do you, if ever, miss payments on any of your debts?
- Has a collection agency had to collect an unpaid bill from you?
- Have you ever declared bankruptcy?
Having accounts showing past due is a negative factor because new lenders believe if you are presently having difficulties paying accounts on time, that you will not pay their account as agreed. Lenders look at whether an account is past due, how many payments past due, the amount past due, and the type of account involved. Lenders look at delinquency as minor (less than 3 payments past due) or major (more than 3 payments past due). Depending on the type of credit you are applying for, one or two minor delinquencies may be overlooked; however, the decision also depends on the type of account and amount past due. Lenders look at the recency of the delinquency. If the delinquency is current, the rating will be lower than if the delinquency occurred in the past.
- What is your total credit limits combined on your credit cards and lines of credit?
- Are you spending close to your credit limit?
Lenders can tell how you are managing credit by the amount you have available to you, compared to how much you are using at any given time. When you are applying for new credit, the lender evaluates the number of revolving accounts (where a minimum monthly payment is made) compared to the total available credit on those cards to see if you are reaching the maximum credit available to you. If so, that is a warning sign that you are not able to carry the debt, are incurring high interest charges, and may be taking an additional credit that will cause further difficulties down the road.
Length of Credit History
- When were your accounts opened?
- How long have your accounts been active?
The age of the oldest account on your credit file is a good indicator of how much credit experience you have. If your oldest account is more than 4-5 years old, you are considered to have solid credit experience in that account type. If your oldest account is less than that, other factors such as the number of accounts and type of accounts will be more important in determining your ability to manage credit.
- How often has someone asked about your credit report?
- How many times a year have you applied for new credits?
Consumers who are actively seeking new credit accounts are riskier than consumers who are not seeking credit.
There are different types of inquiries on your credit report. Your credit score only considers those inquiries that were posted as a result of you applying for credit.
Inquiries that are not considered in your credit score include:
- Account review inquiries (where a lender with whom you have an account has received your credit report)
- Consumer disclosure inquiries (where you have requested a copy of your own credit report)
Types of Credits
- Do you only have credit cards?
- Or, do you have a mix of credit cards, loans, lines of credit, and mortgages?
The total high credit or limit on accounts and the balance outstanding is grouped by industries to determine your present and potential usage of credit in that industry, and the diversity of your present and potential credit experience. Generally, the more diversity in industries and types of accounts, the higher the score.
How to Improve Your Credit Score?