How Exactly Does My Credit Score Break Down?
Did you know that, according to a new report published earlier this week by BMO Bank of Montreal, over half of all Canadians (56% to be exact) never check their credit score? Or that some 52% of Canadians don’t even know what a good credit score is?
Considering that good credit is absolutely essential for banks to grant consumers a mortgage or loan, the report is a frightening reminder of the current attitude Canadians are displaying in regards to their credit. Instead of working towards a strong credit score – which will grant them many incentives and perks, including the best available interest rates – Canadians are apparently apathetic when it comes to managing their credit. Which means, when you do finally need to take out a loan and discover you have poor credit, you’ll be subjected to higher interest rates and subprime loans. Banks and major lenders will likely turn you away, because your credit doesn’t show that you can be trusted to pay back a loan.
Finding yourself with a poor credit score is much easier than you think. In the blink of an eye, you can lose a job, get into an accident, lose a loved one, and suddenly, you’ve missed a few payments on your bills, and your credit has taken a serious hit.
With 46% of Canadians carrying credit card debt, in addition to paying off mortgages, auto loans, and other monthly expenses, the report is a frightening reminder of the financial stress you can find yourself in if you don’t pay your bills on time and adopt good credit-building practices.
It seems many Canadians don’t know what even constitutes a good credit score, let alone what a credit score even consists of. Well, allow us to break it down for you.
Breaking Down Your Credit Score
There are two credit bureaus in Canada that rank your credit: Equifax and Transunion, both of which rank your credit score from a scale of 300 to 900. The higher your number, the better your credit score, and the less of a “risk” you are to banks and lenders. Most experts agree that maintaining a high credit score can literally save you thousands you’d otherwise be forced to spend on high interest rates.
To obtain your credit score, you’ll have to pay a small fine to either of these bureaus; however, if you’re looking for your borrowing and repayment history, you can have a free credit report mailed to you.
Your credit score, called a FICO score, is based on a mathematical equation developed by the Fair Isaac Corporation in 1958. While the general public does not have access to the equation itself, FICO has shared the factors these bureaus consider when weighing your score:
Payment History (35%)
“The biggest component in delivering a score is the payment history of that consumer,” explains Paul Le Fevre, director of operations at Equifax Canada, in an interview with Global News. “So that includes: is everything paid on time? Has there been a late payment or periodic late payments?” When factoring in your credit score, credit bureaus consider any type of loan you have, from mortgage to credit cards, and how often you’re late paying your bills, including your cell phone, internet, hydro, etc. It also considers bankruptcy and consumer reports in ranking your score.
Amounts Owed (30%)
Scott Hannah, President and CEO of the Credit Counselling Society, advises that you keep your credit balance less than 50% of your limit, or it could bring down your score. For example, if your credit card limit is $5,000, and you owe $4,000, it will negatively affect your score.
Length of Credit History (15%)
The longer you have an account (say a credit card or line of debt) and maintain viable practices like paying your bills on time, the better your credit score will be. Credit bureaus look at how often you use your credit – if you don’t use it at all, your score remains stagnant, but if you use it too much, it doesn’t help either. Try to find that perfect balance, where you can always pay it off in full at the end of the month.
New Credit (10%)
Each time a lender makes a hard inquiry into your credit, it has the potential to lower your score. However, according to Le Fevre, it’s not to the extent that you’d expect. “When you’re applying for a car loan or a mortgage, the system recognizes that you may be…going to multiple locations,” he says. In any event, before a creditor makes an inquiry, make sure you do your research first to ensure the lender is reputable and trusted.
Inquiry or Types of Credit Used (10%)
Credit bureaus acknowledge that each type of credit is weighed differently. “You look at a mortgage,” explains Le Fevre, “every month, the amount owed will come down because of the payments being made.” But a credit card can be maxed out in a single day of making purchases, meaning the risk is higher. The amount of credit cards and lines of credit you apply for also impact your score. If the bureau receives multiple credit inquiries from various credit card companies in a short time frame, it will likely lower your score.
How Can I Improve My Credit?
The number one best way to improve your credit is by ALWAYS paying your bills on time – no other way around it. Avoid making financial mistakes, create a carefully thought-out budget plan, and stick to it by all means necessary. Keep your credit card balances below 50% of your limit, and pay more than the minimum amount due. Also, don’t apply for more credit unless you absolutely need it.
Many consumers don’t know it, but one of the most impactful ways to improve your score is by applying for an auto loan, as you can prove to lenders that you can be trusted with a loan. Though we recommend you do it with a reputable auto loan company like Auto Loan Solutions that specializes in bad credit car loans. Our priority is to help you reestablish your credit, by getting you pre-approved for a vehicle that’s suited to your financial needs.
We coach our customers on the best practices in credit and financing, like looking for cars with the best resale value, and suggesting they refinance their loan after a 12-month period where they always pay their bills on time.
Don’t believe us? Check out these customer testimonials! Apply today.