Your credit score is a very important aspect of your financial health. It is a measure lenders consider to be your default risk, as the risk premium that must be added to the price at which you borrow. Your credit score or credit rating is something that can take years to build up slowly and tumble down ever so quickly. When you apply for a credit card, personal loan, mortgage, certain insurance (some provinces have restrictions), for business needs or even a cell phone, your credit score matters. It can make the difference between getting the terms you are seeking (e.g., the interest rate and/or credit limit) or being approved for a loan or credit at all. Even getting a place as a tenant or hired for a contract job can be challenging if your credit rating is poor. Having knowledge about how to build and maintain good credit rating is critical. Also important is how to avoid a falling credit score.
What is a Credit Score?
A credit score is a three digit number which takes into account information from your credit history. It also factors in your account bill payment history, which is not in the credit report. The score ranges from 300 to 900, with a higher score being better. A score of 900 is practically impossible, but 750+ is excellent, 700-749 is good, and 650-699 is a fair score. Below 650 is poor and below 600 is bad. You can’t assume that your score is good (or isn’t good) because your bills are (or aren’t) always paid on time. Your credit score can change each month as your credit report is updated and it could contain errors as well.
How is a Credit Score Calculated?
A credit score is derived from a mathematical formula that takes a number of factors into consideration. It gives the highest weight (at 35%) to your payment history. Outstanding debt compared to your income is also factored in (at approximately 30%), such that the number is higher as you have less debt compared to your income. Credit history accounts for about 25% of the score, and a higher number is awarded to longer held accounts. New accounts that are opened are also considered (at approximately 10%).
Because the two major credit bureaus in Canada have slight variances in the version they use based on the FICO formula (from the Fair Isaac Corporation), their scores can vary a little for the same person. In response, lenders may use the middle score for reference if a score is deemed borderline for extending the credit.
Can Lenders Arrive a Different Credit Score?
Yes, lenders can come up with their own credit scores that can be different from the credit bureau’s scores and a little different from each other as well even if they are created at the same time using the same information in your credit report. One lender’s viewpoint of your default risk might vary from the next, in putting more weight on some information than other information. A lender can also review other factors, such as you income level, stability of employment, how long you have lived at your residence, and the value of any assets you own. The purpose of the loan also matters in the lender’s assessment of your financial footing, such as whether you wish to take out a mortgage to finance a new home or renovation project or to consolidate your loans to avoid further credit card debt or a potential bankruptcy.
What Helps Your Credit Score?
You can build up your credit score over a long period of time by taking out credit regularly and paying it in full on time. By using your credit, you can create a good borrowing history, especially by keeping your outstanding debt low by using little of the credit you are approved to use.
What Hurts Your Credit Score?
One of the drawbacks of credit is that it is all too easy to use it and fail to repay the amount owed. If you overextend your credit, fail to repay what you owe in full, or ignore overdue bills, your credit score can quickly decline. Making the minimum payment due is critical but you are better off paying in full to prevent the amount of debt you will have outstanding from rising relative to your income.
A high number of inquiries made for credit applications over a short period (e.g., 30 days) can hurt your credit score. While not all hits are viewed negatively (e.g., prescreening or monitoring of accounts), several inquiries made by a lender, landlord or employer can each be considered hits against your credit score, so it is best to limit or hold off on the number of new inquiries made.
How Can I Get My Credit Score?
You can request your credit score from Equifax Canada and Transunion Canada for a fee. These credit bureaus are private companies governed by regulations that sell credit reports to their members, such as banks, credit unions, other financial institutions, credit card companies, auto leasing companies and retailers. Usually, by signing an application for credit, you allow the lender to access your credit report when you first apply and while the account remains open. The two reporting agencies may have different information about you in their files and so it is best to review the information on file at both places.
Your credit score can be requested through any means for a fee and you can also request a free annual credit report once annually. Your own inquires do not hurt your credit score. The free credit report can only be requested by mail, fax, telephone, or in person and received by mail or in person. There is a fee for all online access to information at Equifax and Transunion. When ordering by mail or fax, you must provide a written request using the available forms and two pieces of acceptable identification. When ordering by telephone, you must confirm your identity on the automated system by providing your Social Insurance Number, answering a set of personal and financial questions and/or giving the number of a credit card you own.
How Can Faber Help Me Raise My Credit Score?
At Faber we can start by reviewing your credit history and credit score with you. We’ll help you understand how credit information can help or hurt you financially. As Licensed Insolvency Trustee’s, we can assist you in debt solutions that can eliminate your debt, protect you from creditors and give you back your peace of mind. It all starts with booking a free and confidential consultation at any of our 16 locations across the province.