Last month I wrote an article about how to read your Credit Report. Since then, I’ve had a few people ask me about the credit scores themselves. It’s an important topic, so I hope the following can help everyone understand how the credit bureau agencies create your credit score.
In Canada there are two credit bureau agencies that collect credit information and establish credit scores: Equifax and TransUnion. Every time you apply for credit and make or miss a payment on a bill, that company reports that occurrence to the credit agencies. With that information the credit agencies determine your credit score. A credit score is a 3 digit number that represents your borrowing and repayment history, with 300 being the worst and 900 being the best.
What influences your credit score?
The credit agencies use a formula to determine your credit score. This formula takes into account the following:
- · Payment History – Do you make your payments on time for credit cards and loans? Not missing payments shows an ability and willingness to handle your debt. Missing payments will lower your score.
- · Amount Owing – How much money have you borrowed, and how much of your accessible credit are you using? Are your lines of credit and credit cards maxed out or only used a bit? Maxed out credit lowers your score.
- · Account History – How long have you had these loans? Having a loan for a long time without missing payments is good for your score.
- · Recent Inquiries For Your Score – How many times have companies asked about your credit score in the past year? If you have more than one application in a year, this lowers your score a bit each time. This includes vehicle financing companies, furniture financing, and credit card applications.
- · Type of Credit Used – Do you have bank loans and bank credit cards or store brand credit cards? Bank loans and credit cards get a better score than store credit cards because they do a more thorough credit investigation when approving loans and cards. Associated with this, many store cards, because of approving almost everyone, have interest rates of over 26%, while many bank cards are around 18%.
- · Collections or Bankruptcies – Have you had any bills sent to a collection agency or have you declared bankruptcy? Any bill, Telus, Atco, Bell… that is sent to collections will lower your score. A bankruptcy really lowers your score, and often makes it so a bank won’t lend to you for at least 2 years.
Young adults often over borrow, especially in college, and this negatively impacts their rating for quite a while, as most credit reports stay on your credit score for about 7 years. Another common mistake is to not make a payment on a credit card for 3 months and then pay it off completely. Meanwhile three months of delinquent payments are reported, lowering the score. It doesn’t matter that the whole thing is paid off, there were delinquent months and that shows up in your history.
Related to the late payments, some credit cards (mostly store cards) report everyday while others report monthly (most bank or CU cards). For the daily reporting cards, this means if you are one day late your credit score will have a delinquent payment showing on it.
So, my recommendations to earn and keep a good credit score are:
- Get only 1 or 2 credit cards. Use them, but pay them off quickly.
- Do not miss payments on anything.
- Do not max out your available debt.
- Check your credit report out once a year. You can order it here.