How Your Credit Score Is Determined
We all know that we have a credit score that can seem to be determined by powerful and nameless beings behind the scenes much like the Great Oz himself, but thankfully, that is not at all the case. Your credit score is based on a set of 5 criteria that are weighted differently, and this score is based solely on you and the way you manage your bills. This week we will look at these and a few other interesting tidbits about credit, which may just help you increase your score.
There are 2 credit agencies in Canada: Transunion and Equifax. Mortgage lenders, credit cards companies, cell phone providers, banks, credit unions and so on rely on the information they are given about you for future lending. In return, they provide a monthly report about you to these companies so that your score will be based on your proven track record of payments. Both companies receive a fee for each credit bureau which is pulled which makes them a for profit business. That just means that they will be doing their best to ensure the information is as accurate as possible, so that the banks do not decide to use their competitor instead. There are actually a number of credit scores reported on the credit bureau to give a potential lender as complete a picture as possible about you. Credit scores range between 0 and 900. The higher your score the better off you are and the better the terms you will likely be offered on loans. They are made up of the following 5 criteria:
- Payment History 35% – Do you pay your bills on time?
- Utilization 30% – How close to the limit are you on your available credit?
- History 15% – How long has each account been active?
- New Credit 10% - How many inquiries have you had? Are you applying for a pile of new credit? This can be indication of needing additional funds to pay off the ones you already have.
- Credit Mix 10% – Do you have a revolving credit type like a credit card or just instalment loans?
A few things that are important to remember are that lenders each have their own adjudication rules, and some will offer a loan at a much higher rate to mitigate the risks of a blemished history. There has also been a change to the reporting system within the last few weeks so that Canadians who have only a cell phone and a mortgage will now have a credit score, where before they would have been reported as a reject beacon. They have also changed things so that if you have thin credit with only 1 thing reporting you will be given a lower score. On the other side, if your credit picture is overall very strong, then you will be given a higher score, even if there was a missed payment or 2 some ways back. They will now acknowledge that this was the exception to an otherwise very strong profile.
The magic number as far as mortgage lending goes is 2. They like to see that you have 2 types of credit reporting for at least 2 years. This is the one thing we wish all people knew and that this one fact was taught in high schools everywhere. I know that your grandmother has told you that credit is bad but this isn’t true, it’s the mismanagement of credit which is bad, and if you do not have an established credit history when you apply for a mortgage you will not be offered best rates. Get yourself 2 types of credit reporting. Heads up, a supplementary credit card on your spouse’s account may not report on your behalf to the credit agencies. Make sure that yours is.
Final thought for today, pull your own credit every 6 months. Make sure things are reporting accurately and protest loudly to the companies if they have made a mistake. You can also file a complaint with Equifax or Transunion, so that any discrepancy has a note on it at least while you are getting it cleared up. You can get your report online with your credit score for a cost of about $23.95 or you can get a free report without the score by mail. Visit the site of either for information on how to do so. That’s all for today.