Shockingly, most of us were not taught about credit, basic finance or even doing our own taxes in school. It can seem overly complex in many regards and often times we don’t seek out our score or learn what affects it until we actually need to borrow money. This can prove to be frustrating when applications are denied, and we don’t know the necessary steps to improve our financial picture. Having a good understanding of what a credit score is and what goes into calculating this number will put you in the best position to take control, fix delinquencies and maintain a healthy score prior to utilizing or applying for credit.
What is a credit score?
A credit score is a numerical expression based on an analysis of a person’s credit files and payment history to represent the creditworthiness of an individual. Essentially, this score tells lending institutions how likely you are to pay back a loan and will determine the interest rate they give you.
Your personal score is outlined in a credit report pulled from either TransUnion or Equifax in Canada. This report shows a variety of aspects including:
- Personal information such as your social insurance number, date of birth, address and
- Reports on the type of accounts you have (credit cards, auto loan, student loans,
- The date you opened the account, credit limit or loan amount, account balance and
- Inquiries made and a list of everyone who has accessed your credit report within the last
- Public records and collections
Depending on the institution, your score will range from the lowest possible rating of 300 to the best being 900. A healthy score that most lenders are looking for is 680+.
YOUR CREDIT SCORE
What factors influence my credit score? How is it calculated?
The exact algorithm for calculating scores is confidential and proprietary to the agency you’re ordering your credit check from, but some factors outweigh others in terms of importance and relevance. Your credit will be calculated by balancing these factors:
1. Payment History: Your payment history weighs heaviest on the scale of determining your score. Lenders will check to make sure your payments have been made on time if you have made late payments and/or periodically late payments. This shows your reliability and responsibility when it comes to paying back debts.
2. Utilization: The second most important factor is how much of your available credit you are currently using. Say you have a credit card with a limit of $5000 if you have a balance of $4500 that means you are utilizing 90% of your total credit. This puts you in a higher risk category in a lender’s eyes and will, therefore, lower your score. Typically, they like to see no more than 60% of your total credit being used to ensure if something were to happen with your income, you wouldn’t be struggling to make payments.
3. Length of Credit History: Wondering why your credit is low even though you pay your bills on time? This could be due to the fact that there is not enough history to give institutions an accurate picture of your creditworthiness. The longer the length of time your account has been open and in good standing will show a better overall picture of your financial health and responsibility. For someone who has not used credit for a very long time, it is more difficult to tell if they really know how to use it responsibly. That is why it is a good idea to use your credit, at the very least sparingly, and to pay it off on time. This may lead you to think “so how long will a budgeting blunder stay on my report for?” The amount of time in Canada is 6-7 years (this will vary depending on the institution, type of debt and province or territory you’re in) until it is cleared and no longer on your report. This includes bankruptcy, missed payments, bounced checks and accounts that were sent to collections
4. Product Type: The type of loan or product you have can impact your score as well. For example, with a mortgage, you are paying off a certain amount every month which in turn lowers the principal (outstanding balance). Whereas with a credit card or line of credit, you are able to quickly max out or rack up a large amount of debt in a short amount of time.
5. Inquiries: Many people are concerned that the more their credit gets pulled, the worse it gets. This is not necessarily the case but can appear to lenders as “credit shopping” when you are frequently applying for more credit which can signal financial difficulty.
If this is a concern of yours, consider using a mortgage agent as they have access to the greatest number of lenders and in Vine Group’s case, better rates with banks than some may offer even at the branch level.
How do I raise my score/keep it in good standing?
Pay your bills! On time, every time. It is helpful to set up automatic or recurring billing or even setting up calendar reminders on your phone to keep you up to date and informed on when you owe what. Even information you may not think is relevant, such as a cellphone bill, count. The system factors in all your accounts and the timeliness of payments on each one.
Use credit sparingly. Keep your credit well below the limit and try to never max out an account.
Pay off your debts. Not owing any money makes an astronomical difference in your score. You may be asking “how long does it take to improve once I pay off my debts?” but there is no clear answer as there are several variables. Living within your means and budgeting accordingly will be the most beneficial to your credit long term.
Check your credit score. Read through the lines and make sure you know where your money has gone and what credit you have used. In this day and age fraud is running rampant. Checking your credit on a regular basis will ensure you’re in good standing and no one has accessed or used your credit.
Overall, knowledge is key to maintaining financial health and a free and clear credit report. Be aware of the purchases you make and how certain things will influence your score. Spend within your means and be patient. We all make mistakes but what defines us is how we recover from them.