Credit Score Explained
We all know your credit score is important but how is it actually calculated? You see, this is important because just like an exam, you can focus on things where the credit report agencies would put more emphasis so that you can improve your credit score faster.
What is a credit report and what info is on it?
A credit report is the primary tool that lenders use to establish a borrower’s creditworthiness. An individual’s credit report includes personal identification information as well as financial information such as a record of payment history on all credit products, on cell phones, and if there have been any collections or past bankruptcies. It also reflects current outstanding balances and maximum credit limits. The credit report shows how many times the borrower has applied for new credit. And all this information influences a borrower’s credit score.
In Canada, there are two credit reporting agencies, Equifax and TransUnion; however, not all credit providers report to both agencies and the details between reports can vary. In addition to a borrower’s credit profile, lenders often make decisions based on employment, how much debt you have compared to your income level, and the ability to easily make payments from month-to-month for a sustained period. That’s why your score will most likely be different depending on who pulls your credit. For the majority of lenders, they’ll use Equifax.
Now this is how your credit score is broken down starting with:
This accounts for 35% of your credit score. Your score includes how all credit accounts are being repaid. Not only does this consist of any late monthly payments, but also items of public record and foreclosures. It’s important to note that a co-borrower or guarantor has just as much responsibility on the payment as the primary borrower. For instance, a missed payment on a co-signed credit card will show on both borrowers’ credit reports. So if it’s possible, don’t co-sign with anyone!
This accounts for 30% of your score. This is a measure of how much of your available credit, on credit cards and/or lines of credit, is being used. It also factors in the number of accounts with balances and the amount paid down on installment loans. Generally, lower credit utilization demonstrates more credit discipline and is viewed as positive.So, try not to max out your credit cards or lines of credits.
LENGTH OF CREDIT HISTORY:
This accounts for 15% of your score. Your score not only considers the date that the first account was opened, but also the average age of the accounts on the report. Creditors typically want to see at least two open trades on a credit report, each being used for a minimum of two years. I know there are some people who like signing up for new cards, getting the welcome bonus, and then closing it right away. That may actually hurt your credit score.
People always ask, if you pull my credit bureau, is my credit score going to drop? It does have an impact but it only accounts for 10% of your score. This plays a big part only for borrowers who continually seek new credit over and over and over again.
Now, there is an exception and this is very interesting. For borrowers who are shopping for a mortgage or auto-loan, as long as the credit pulls are within a 2 week period of time, the credit score will not be substantially impacted because they’ll count it as only 1 inquiry.
And if you or your employer is pulling your credit, it will not affect your score at all!
TYPES OF CREDIT:
In general, lenders and creditors like to see borrowers manage a variety of credit types. A borrower’s credit score can improve if they have demonstrated the ability to manage several different credit accounts. So instead of just having credit cards, get a line of credit or a loan so that you can show a variety of different products. This accounts of 10% of your score.
Sometimes I also get asked, how long do judgments or bankruptcy stay on the report?
For judgments and bankruptcy, it’s 6 years for both Equifax and Transunion.
Consumer proposals will be removed 3 years after all debts have been paid. And TransUnion removes it from the credit report either 3 years after all included debts have been paid; or 6 years after the proposal is signed. For double bankruptcy, it’ll stay on the credit report for 14 years.
If you’re someone who has poor credit, here are some tips to improve it right away:
You can establish a minimum of 2-3 trades with good repayment history for 24 months. The longer a credit facility is open and active with timely repayment, the better the score can be.
And ensure these trades are varied: Get credit cards, installment loans, lines-of-credit and department store cards.
Having a lack of credit DOES NOT mean you have good credit!
Illustrate the use of credit on a regular basis and ensure repayment is on time. What may help is arranging automatic payments if possible.
Check credit reports on a regular basis, making the necessary corrections and updates.
And in general, apply for credit only when required.
If you have any questions about this, feel free to contact us and we'll answer any questions you may have!