Learn About Your Credit and Credit Score

What is a Credit Score?

Your credit score and rating are produced by Equifax. Your credit score is also referred to as a FICO Score as the mathematical formulas behind your score were created by Fair Isaac & Company (FICO) or Beacon Score. This Credit Score is used by most lenders to help them decide whether or not you’re a good (low) credit risk. Equifax crunches the numbers from your credit report, and spits out a score somewhere between 300 and 900. A low score says you’re a bad credit risk, a score of 700 or higher puts you in the driver’s seat. Here are the factors considered by Equifax when calculating your credit score and an estimate of how heavily each factor is weighted.

Understanding your Credit Bureau Report

The higher your number or ‘Beacon’ score, the better your credit rating. The purpose of the score is to provide a lender with a prediction as to the credit risk you represent, based on your past behaviour. Here is what your score is based on:

1. Past Performance – 35%

• The fewer late payments you make, and the fewer judgments, liens or collections you have, the better
• Late payments are time sensitive. The Credit Bureau will give more weight to recent occurrences of late payments as opposed to those two years or older

2. Outstanding Debt/Credit Utilization – 30%

• Low balances on several cards are better than high balances on a few cards
• It is ideal to keep the maximum charged to the credit cards at or below 70% of the available credit and your score will be adversely affected once you exceed 80% of the available credit on those cards.

3. Credit History – 15%

• The longer the credit accounts have been open and in good standing, the better

4. Types of Credit in Use – 10%

• Finance company accounts like BestBuy and HBC cards score lower than traditional banking or retail accounts
• Deferred payment options (i.e. buy now and pay later) are interpreted as a potential future risk

5. Inquiries – 10%

• Having too many inquiries over a short period of time can be perceived as ‘shopping for credit’ and be indicative of high risk
• If you carry a good credit score to begin with, inquiries will have little to no affect on your score

Interpreting Your Score

> Credit scores range from 400 to 900
> The average consumer has a score of 780
> First-rate lenders want a score of at least 740
> Second-rate lenders want a minimum score of 640 or higher

It is interesting to note that your net worth or your annual income is not part of your credit score calculation. There is no fundamental reason why a groundskeeper should have a lower credit score than a surgeon.

The reporting system is not perfect, make sure to verify the information on your credit bureau report. If you find an error the first step is to call the Credit Agency at 1 800 465 7166.

What can you do to build your Credit Score?

• Pay your bills on time. Delinquent payments and collections can have a major negative impact on a score.
• Keep balances low on credit cards and other “revolving credit.” High outstanding debt can affect a score.
• Apply for and open new credit accounts only as needed. Don’t open accounts just to have a better credit mix—it probably won’t raise your score.
• Pay off debt rather than moving it around. Also, don’t close unused cards as a short-term strategy to raise your score. Owing the same amount but having fewer open accounts may lower your score.
• Make sure the information in your credit report is correct. It won’t affect your score to request and check your own credit report. If you find errors, contact the credit reporting agency and your lender.

How to check your Credit

Or visit www.equifax.ca to order your report and score for a fee. Yes you can repair your own credit! Most people, however, find that they do not have the time, persistence, knowledge, or patience to. Most choose to have a professional handle the debt consolidation process instead. Why do we recommend debt consolidation instead of bankruptcy?

How to repair damaged Credit

Bankruptcy - the Hard Way Out

Filing for bankruptcy has very serious consequences. Once you have filed for bankruptcy, your credit bureau will carry this record for at least six years –making it very hard for you to re-establish your credit. Additionally, many of Canada’s lenders will never loan you money again if they suffered a loss as a consequence of your bankruptcy filing. In the vast majority of circumstances, the best course of action is to consolidate your debts, lower your monthly payments, and re-establish control of your finances. We do have some lenders that will provide mortgages for clients that have been discharged for 2 years and have 1 year of re-established credit with 2 trades (a Credit card and a loan or 2 Credit cards) It can be a challenge to re-establish your credit. The best way is to get a Secured credit card. A secured credit card requires that you put the funds down upfront to the credit card provider. If you default on the credit card the credit provider keeps the funds you gave them.

Re-establishing Credit

You can apply for a secured credit card at: http://www.capitalone.ca/canada/credit-card/guaranteed-secured-mastercard/ For more information about your Credit rating, how to manage/improve your score and what factors affect it, check out Know the Credit FAQ’s

Note: Rules and guidelines are subject to change. Please inquire within.