What’s in a Credit Score?
I will be offering up a credit series that gives you information on what a credit score is, how to maintain it, how to maximize your credit, and how to repair it. We will go step by step, so that beginners have an opportunity to get their feet wet. If you are not a beginner, please check back or offer up your suggestions below. We’d love to feature some tried-and-true examples and some questions from those of you who are looking to build up your credit, so please contact me here.
A credit score is a numerical value that is assigned to everyone with a Social Insurance Number, or for my friends in the south, a Social Security Number.
This numerical value, or credit score, is calculated by one of two credit bureaus in Canada. TransUnion and Equifax obtain information from creditors, or lenders, and input all of the information into a database. Each piece of information is weighted with a significance factor to establish a credit score.
The Anatomy of a Credit Score
Credit Scores range from 300 – 900. The closer to 900 you are, the better your score. The average credit score in Canada is 749, which is considered pretty good. If you are below that number, chances are you’ve had some issues with your credit in the past.
There are 5 main categories that can affect your overall score:
- How much credit you have (30%)
- Your payment history of that credit (35%)
- The length of time you’ve held that credit (15%)
- How many inquiries for credit you make (10%)
- The type of credit you have (10%)
How Much Credit You Have:
Credit is considered the borrowing power you have, or how much “trouble” you could get into.
Meet Joe. Joe is our example man today. Joe has three credit cards. He has one with his main bank, one with a retailer, and one with another institution.
Card One: Visa with Royal Bank of Canada, limit of $5,000.00.
Card Two: Mastercard with Canadian Tire, limit of $1,000.00.
Card Three: Mastercard with Scotiabank, limit of $3,000.00.
In this example, Joe has a borrowing power of $9,000.00 in revolving credit.
Your Payment History of that Credit
Every month, or every payment cycle, your creditor or lender tells the credit bureau three things: how much your balance was, how much your payment was, and if you paid it that month.
If you do not pay your credit account on time, the credit bureau gets notice of this, and makes a mark on your file. This affects your credit score and brings it down. If you pay your account on time, then no mark is made.
Length of Time You’ve Held Credit
The credit bureau likes to see that you can manage your credit, and the longer that you hold credit indicates that you can manage credit to the satisfaction or approval of the creditor.
It’s not set in stone how long you need to hold credit for in order for it to positively affect your credit score, but it’s always recommended to keep one or two credit cards and use them periodically to keep them active. It goes without saying that the longer you can hold credit, you must be doing something right, as the lender continues to reward you with the ability to borrow.
How Many Inquiries You Make
An inquiry is just that: you inquire about obtaining credit. Credit bureaus are not big fans of people who ask for credit all the time, as it makes you appear too risky. Imagine if you had two children, and one is always asking for money. Your second child does not. She uses what money she has for the things that she wants. If the second child came to you and asked for money, you’d be more inclined to give it to her than the first, simply because she doesn’t ask often.
Your credit works a lot like this. Credit inquiries will hurt your score, albeit temporarily, but the more you ask for, the more you will have your score drop. The more your score drops, the more likely you will not be approved for credit. It’s certainly a lose-lose situation.
The Type of Credit You Have
How many types of credit can you have? Here’s a list of the most common ones, and they are each weighted differently:
- Revolving Credit, like credit cards
- Revolving Monthly Accounts, like cell phones
- Installment Loans, like cars or student loans
- Installment Mortgages
- Revolving Mortgages, like lines of credit
The first step in safekeeping your credit is to do regular credit checks. You want to ensure that someone else is not using your credit, your credit is not being checked without your approval, and that your lenders are reporting your accounts accurately.
Checking Your Credit
Borrowell is a Canadian company designed to help Canadians build and improve credit. Even if you do not think you need to change your credit habits, Borrowell allows you to obtain a free credit report and score without dinging your credit score. You can track your progress over time, and get reports on how you are doing, plus they have offers for loans, credit cards and more, based on your credit profile.
Why I Love Borrowell
I started using Borrowell a couple of years ago so that I could ensure my credit was reporting correctly.
I have found inaccuracies and had them fixed. Imagine if I’d never looked!
Borrowell also sends me periodic emails to tell me that my credit score has been updated, and to confirm that any new additions to my credit are valid. They tell me if a bank has a better deal geared to my credit score, so that I could obtain a low-interest credit card, a mortgage, or qualify for a loan.
Plus, did I mention it was free?
Now You Know
Now that you understand the basics of a credit score, I recommend that you go immediately to check yours. Make sure that each account is reporting correctly, and that there are no collection amounts.
The next installment of this series will talk more about how to improve credit and get you to that top score.
Other Sites to Get a Free Score and Report:
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