Your Credit Score
A credit score is a number lenders use to help them decide: “If I give this person a loan or credit card, how likely is it I will get paid back on time?” A score is a snapshot of your credit risk picture at a particular point in time. Credit scores can range from a low of 300 to a high of 850. The higher the score the lower the risk.
Your credit score is comprised of five categories;
1. Payment History (Approximately 35% of your score is based on this category)
The first thing any lender would want to know is whether you have paid past credit accounts on time. This includes credit cards (Visa, MasterCard, American Express etc.), retail accounts (credit from department stores), installment loans (loans where you make regular payments, such as car loans) and finance company accounts.
The score takes into account how late the payments were, the frequency and how recent the delinquency is. For example a 60-day late payment last month will count more than a 90-day late payment from five years ago. The number of accounts with late payments also affects your score.
2. Amounts Owed (Approximately 30% of your score is based on this category)
Having credit accounts and owing money on them does not mean you are a high-risk borrower with a low score. However, owing a great deal of money on many accounts can indicate that a person is overextended, and is more likely to make some payments late or not at all.
Your score takes into account, the amount owed on all accounts, the amount owed on different types of accounts (i.e. Credit card debt versus loan debt), how many accounts have balances, how much of the total credit is being used on credit cards and other revolving credit accounts (i.e. Credit lines etc.). If your credit cards are maxed out that has a negative impact on your score. The last component of this calculation is how much of installment loan accounts is still owed compared with the original loan amount, for example if you borrowed $10,000 to buy a car an you paid back $6000, this would score higher than if you have only paid back $2000.
3. Length of Credit History (Approximately 15% of your score is based on this category)
In general, a longer credit history will increase your score. However, even people who have not been using credit long may have high scores depending on how the rest of the credit report looks.
4. New Credit (Approximately 10% of your score is based on this category)
People tend to have more credit today and to shop for credit more frequently. Research shows that opening several credit accounts in a sort period of time does represent greater risk. Each time you apply for credit a vendor will do an inquiry into your credit and each inquiry decreases your score. If you employ the services of a Mortgage Broker they only take one credit inquiry and shop for you to obtain the best rate, if you go to each bank in town they will each look at your credit and your credit score will decrease as a result of the inquiries.
The New Credit component also takes into account how many “New” accounts you have opened.
5. Types of Credit in Use (Approximately 10% of your score is based on this category)
The score will consider your mix of credit cards, retail accounts, installment loans and finance company accounts. For example you would get a higher score for operating a credit card satisfactorily that a finance company loan.
Hints to Keep Your Credit on Track
· Order your credit report often to ensure the information is accurate. Visit www.Equifax.ca to order your personal credit report.
(A personal inquiry will not negatively impact your credit score)
· Make all payments ON TIME, even if is only a $20 payment!
· Try not to exceed 75% of your credit card limit, for example if your limit is $2000, do not let your balance exceed $1500 at anytime during the month.
· Keep your Credit Inquiries and New Credit accounts to a minimum.
