Your Credit Score

The Credit Score is a numerical representation of your current and past credit and can range between 300 (the lowest score representing the worst) and 900 (the highest score representing the best). There are currently two reporting agencies operating in Canada, Equifax and TransUnion. Equifax’s credit score is called the Beacon while TransUnion’s credit score is called Empirica, but both scoring models are based on the FICO (Fair Isaac Company) model in the United States.

Credit scoring has an enormous impact on your financial picture. For a lender, your credit score plays a significant factor in the decision to lend you money, and in determining the terms and conditions of your loan.

Credit scoring model seeks to quantify how likely the consumers are to pay off their debt without being late. The more your credit file demonstrates that you pay your debt on time, the more desirable you become as a potential customer. The higher the client's score is, the less likely they are to default on their loan.

Major Items That Can Affect Your Credit Score

Credit score comprises several factors. They are listed in order of importance (just as an underwriter will look at the score):

  1. Payment History - Paying debt on time and in full has a positive impact. Late payment, judgements, bankruptcies, collections and charge-offs have a negative impact. Missing a high payment has a more severe impact than missing a low payment. Bad credit history is considered quite serious and have a significant detrimental impact on your credit score.

  2. Outstanding Credit Balances - The ratio marking the difference between the outstanding balance and the available credit is important here. Ideally, the client should keep their balance below 30 percent of the available credit limit. Having balances over this amount may lower your score. Also if you have several accounts with high balances (in relation to the available credit) may have negative impact on your credit score as that indicate that you are relying heavily on credit to meet your daily needs.

  3. Credit History - This marks the length of time since a particular credit line was established. A borrower with a longer trade line is stronger in this area and will have higher credit score. So, if you are considering closing an account, you should consider closing the most recently opened account.

  4. Type of Credit - A mix of auto loans, major credit cards (such as a Visa or Master Card), store cards and loans is more positive than a concentration of debt from credit cards only. Keep in mind that too many credit cards and loans can increase the number of trades on a file which can negatively impact your credit score.

  5. New Credit & Inquiries - This quantifies the number of inquiries that have been made on a consumer's credit history within a six month period. Multiple credit inquiries can lower a credit score. There is a a thirty-day buffer if a borrower is seeking loan financing and the multiple inquiries took place within the thirty-day period for that loan. However, multiple applications for other types of credit such as credit cards will lower borrower’s credit score. The length of time since the last new credit account was opened may also have impact on credit score.

  6. Number of Trades on File - The large number of trades on a file can negatively impact borrower’s credit score. Keep only a few trade lines, if you need to improve your individual credit score.

  7. Credit Inactivity - People who regularly use credit responsibly will have higher score than those who don't use credit regularly. Consequently, people who use cash to make purchases can have a lower score than those who regularly use credit.

If you want to obtain your credit report:

Trans Union of Canada - Check Your Credit Score

Equifax Canada - Check Your Credit Score

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Paying debt on time and in full has a positive impact on your credit score.
For best credit score, keep your outstanding credit balance below 30 percent of the available credit limit.
Too many credit cards and loans can increase the number of trades on a file which can negatively impact your credit score.

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