There are 5 main points used to calculate a credit score...
Payment history - Have you made your payments on time? A day or two past due won't be the kiss of death but 30+ days is.
Amount of credit - Basically the more you owe, the lower your score.
Your credit history - The longer the record of good payments, the better the score. Conversely, the longer the history of sloppy payments, the lower the score.
New credit/Inquiries - Lots of credit applications over a short period of time will drop your score. Being a 'credit seeker' is considered risky.
- Types of credit - Too many credit cards, especially with high balances, will bring a score down. A credit card and a car loan, or a line of credit, are considered normal.
How lenders use credit scores
Credit scores are seen as an indicator of how risky it is to lend the client money. The higher the score, the higher the chance of repayment. The lower the score, the lower the chance of repayment.
A score of 300 is the worst and a score of 900 is the best, although in 25 years I have never seen a 900 score. A credit score of 680 opens more mortgage doors and being over 700 is better yet.
Improving your credit score
Pay all of your bills on time - even if it’s just the minimum payment. Paying late, or having your account sent to a collection agency, has a negative impact on your credit score.
Try to keep all credit account balances below 75% of the credit limit. For example, if you have a Visa with a $5,000 limit, keep the balance below $3,750, unless you plan to pay it off right away.
- Avoid applying for credit unless you have a genuine need for a new account. Too many inquiries in a short period of time can sometimes be interpreted as a sign that you are struggling financially.
Do too many inquiries really hurt your score?
Yes and no. The computer will decrease your score if there are too many inquiries of different kinds over a short period of time. One or two inquiries to obtain a mortgage won't hurt your score, but applying for a mortgage, a new car, and a couple credit cards will. Do not take out new loans or credit cards before or during house hunting. This will drop your credit score which can affect your mortgage approval.
Will inaccurate information affect your score?
Yes! If the inaccurate information is about payment history, public records or collections, your score will definitely be affected. As soon as you discover an error, contact TransUnion and Equifax as soon as possible.
It’s advisable to check your credit once a year to confirm the accuracy of the data reported and to make sure no one is fraudulently using your credit. If your identity has been hacked and someone has taken out a loan or credit card in your name, you won’t know until the payments are missed. You can protect yourself by checking annually.
You can request your credit report directly from the credit reporting companies. Here are links to the two main credit bureau companies in Canada: Equifax and TransUnion. They will mail you a copy of your credit report for free; if you want it instantly, both companies offer online access for a nominal fee.
Navigating through the credit reporting world can be challenging (and they are not known for their helpfulness!) so if you need a hand, please feel free to contact me.
Susan Shannon, AMP