Your credit score is a very important number which has the power to impact your life in ways you probably don’t even imagine. It’s used by lenders to determine how likely you are to pay back your debt and it will influence your interest rates and whether you get approved for a loan in the first place.
Utility companies, landlords, employers and insurance companies all verify your credit history before establishing a professional relationship with you. This means that it’s more important than ever to learn how to protect and build your credit score. But do you feel like you need an advanced degree just to make sense of it all? Well the good news is that it’s simpler than you think and this article will shed some light on the factors that affect your score.
Canada has two national credit bureaus: Equifax and TransUnion that provide all your potential creditors with the information they need regarding applicants. Your credit score can vary between 300 to 900 and the magic middle number is 650 which will qualify you for most standard loans. You can also contact the credit bureaus to get a copy of your credit file but know that lenders might see a slightly different number because they apply a specific set of risk rules and therefore use a different algorithm than the one created for consumers. Nevertheless, it should still be in the same numerical range.
There are five main factors that go into calculating your credits score:
- Payment History – 35%
- Credit Utilization – 30%
- Your Credit History Age – 15%
- Types of Credit on Your Report – 10%
- Number of Credit Inquiries – 10%
This is the most important factor that lenders take into consideration before approving an application for financing. A few late payments won’t have a drastic effect on your credit score but multiple ones will raise some red flags and have an impact. These late payments will stay on your credit report for seven years but you can recover your score by paying back your debt.
Major payment issues such as bankruptcy, collection, repossessions and foreclosures can severely damage your credit score making it highly unlikely that you’re get approved for anything which calls for good credit. This means that making your monthly payments on time is critical for maintaining a good credit score.
Having a lot of debt doesn’t automatically imply that you’re a high-risk borrower. Having said that, lenders tend to be careful with applicants that use a large percentage of their available credit funds as someone that owes a lot of money has higher chances of not being able to meet their payments. This means that if you have several maxed-out credit accounts it will affect your chances of being approved for more loans.
Credit utilization refers to exactly this, the ratio of your credit card balances to the credit limit and it makes up 30% of your score. As a general rule, try to keep your credit card use under 30% of your credit limit.
Your Credit History Age
The lengths or age of your credit makes up 15% of your score. This takes into consideration both your oldest account as well as the average age of all your accounts. It matters to lenders because it indicates that you have a great deal of experience managing credit and paying off debt. The longer your credit history is, the easier it is for lenders to estimate how much risk offering you a loan entails which means that closing old accounts or opening a lot of new accounts can affect your credit score.
You don’t have to be a veteran but in general the longer your credit history the better and closed account will still appear on your credit report for around 7 to 10 years.
Types Of Credit On Your Report
There are two main types of credit account: revolving accounts (you can repeatedly borrow money up to your credit limit without specifically applying for a loan) and installment loans (an extension of credit which involves scheduled payments). When you have both types of accounts or loans for different assets and you manage them responsibly it shows lenders that you have experience with multiple forms of credit.
Even so, keep in mind that this accounts for just 10% of your credit score although Canadians with mixed credit tend to have higher scores.
Number Of Credit Inquiries
Every time you submit an application that requires checking your credit score and history it results in an inquiry being placed on your credit report. This makes up 10% of your credit score.
One or two inquiries from time to time doesn’t make much of a difference but a lot of inquiries over a short period of time will lead lenders to believe that you are opening credit accounts because you’re going through some sort of financial difficulties and will become cautious when considering your application for a loan. For this reasons don’t apply for new credit accounts unless you need to although there will be circumstances out of your control such as when you move to a new city and you need to apply for cable, phone, other utilities or mortgage. This will all result in a high number of inquiries.
The good news is that only inquiries made in the last 12 months are factored into your credit score and inquiries older than 24 months will no longer appear on your credit report.
Note the difference between “hard inquiries” – made by institutions and companies when applying for a loan or service- and “soft inquiries when you request your own credit report which will not affect your credit score. You can do this directly from Equifax and TransUnion although the process can be a bit complicated. Another option is to look up Mogo reviews. This company is partnered with Equifax and was among the first in Canada to provide online free credit score viewing and free monthly monitoring. Users can access their platforms from their browser as well as iOS or Android applications and can compare their credit score to the national average, see what changes have occurred in the previous 6 months and get explanations and advice on how to handle it.
This is particularly useful when there are bureau reporting errors such as delinquent accounts reporting on your file which have a negative impact on your credit score and your chances of getting a loan with good interest rates.