If you have ever applied for a loan to finance a house, car, or university tuition, then you probably know that lenders have a keen interest in your credit score.
In Canada, your credit score is a number between 300 to 900. It tells lenders about your creditworthiness. In other words, it tells them whether or not you are responsible enough to pay back a loan. The higher the score, the more likely they will lend you money, and the more likely you will pay a lower interest rate.
Although ranges vary depending on which scoring model is applied, scores 559 and under are generally considered “poor” and may pose a serious obstacle to qualifying for credit. Scores from 560-659, 660-724, and 725-759 are considered fair, good, and very good, respectively. Finally, scores from 760 and over are considered “excellent” and merit the lowest interest rates because they pose the least amount of risk to lenders.
But how exactly is my FICO (Fair Isaac Corporation) credit score calculated, you are asking?
There are two credit bureaus in Canada responsible for calculating your FICO credit score, Equifax and Trans Union. Although each credit bureau uses its own unique data to determine your credit score, thus producing slightly different results, the FICO algorithms remain the same. They also both use the information highlighted by your FICO credit report.
First, credit bureaus look at your payment history (35%). Your payment history shows whether or not you’ve been paying your debts on time. The credit bureaus place the greatest weight on your payment history because it’s the strongest indicator of your ability to repay a loan.
If you can’t pay off all your purchases, it is imperative that you make the minimum payment. Most credit card companies will have a service to make the minimum payment on your behalf so you do not miss this crucial payment no matter how low the amount. Some minimum monthly payments may only be ten dollars, but missing these payments will bruise your credit and may result in thousands of dollars in unnecessary interest in the future. An ounce of prevention is worth a pound of cure, so set up your auto payment as it is a free service with most companies.
Second, credit bureaus look at your credit usage (30%). They compare the amount of credit you are using to your credit limits. If you’re in the habit of maxing out your credit cards, for instance, lenders may think you’re spending more money than you can afford.
If you can’t pay off all your purchases every month and your utilization is above 50%, it begins to affect your credit score adversely. If possible, try to get your utilization below 30%.
Third, credit bureaus look at your credit history (15%). The longer you’ve held a credit account, the more comprehensive a picture they will have of your borrowing and repayment activities.
When a lender reviews your credit report, they look at how long you have had established credit. Try to keep your longest trade credit lines open and do not close or cancel them. If you have a credit line open for 20 years, we recommend that you keep these lines open and close the others that have only been established within the last couple of years.
Forth, credit bureaus look at your public records (10%). A prior history of delinquencies, bankruptcy, liens against your property, and other publicly available information about your financial situation may significantly diminish your creditworthiness.
Both credit reporting agencies have credit monitoring services available for a monthly cost that will alert you to any adverse activity on your credit bureau. If you do not want to pay, there are free services available but you will also be exposed to “product suggestions.”There is no free lunch, so, companies need to sell you credit products to pay for these services. Either way, it is a great idea to be signed up for one of these services.
Fifth, credit bureaus look at the number of inquiries into your credit file (10%). Each time you apply for credit, someone inquires into your credit history. In industry jargon, this inquiry is called a “hard pull.” Too many hard pulls may indicate that you’re “credit shopping.” Credit shopping means you’re applying for more credit because you’ve been maxing out previous credit limits.
However, changes are being made to help consumers “shop for their mortgage” without being penalized as has been the case in the past. Now you can shop with confidence and give your mortgage agent the ability to provide the best advice possible.
Your FICO credit score is a numerical summary of these five aspects highlighted on your credit report. Poor financial decisions or simple mismanagement in your past will almost certainly appear on this report and decrease your credit score. Overall, these poor decisions may hamper your creditworthiness in the eyes of prospective lenders.
It is important to keep in mind that a poor credit score is not your fate. Using simple strategies like budgeting, paying down your debts, and living within your means, may significantly improve your FICO credit score. You can also consult a credit professional to rebuild your credit even quicker.
A Cashin team member has direct access to Equifax and Trans Union through our professional association with both companies. This allows us to correct or fix your credit score faster than doing it yourself.
If you have any questions about your FICO credit score or want to inquire about how Cashin Mortgages can help consolidate your debt or secure a personal or business loan or mortgage, please send us a no-obligation inquiry or book your appointment with a credit specialist today. We are always here to help and happy to hear from you.