Understanding Credit Score
A credit score refers to the credit worthiness of a person. The score expresses the amount of risk you pose to the lender. It is a numerical expression which ranges from 300-900. The score factors in your credit history, how much money you have borrowed, and your overall general stability, to evaluate how likely you are in paying your future payments.
The lower the score, the less credit worthy a person is, and therefore greater the risk for the lender. A higher score indicates higher credit worthiness and consequently lesser risk to the lender.
A higher score makes you more eligible for approval of your credit applications and better interest rates and promotions, which are offered by Banks and other Credit companies.
Where can I get my Credit Score from?
There are two main credit reporting agencies in Canada who can evaluate your credit scores- Equifax and Transunion. They have different parameters for evaluating the score but the end results are almost similar.
Elements of Credit Score:
- Payment History
The single most important factor in determining your score is your payment history. This is determined by how diligent you have been in the past about making payments on time, when was the last payment that you made, and whether you have late payments on any of the accounts etc. Late payments that were made in the past, do not affect your credit score as much as recent late payments.
- Amount You Owe
The second influential factor is how much you already owe and the amount of available credit you have. The “outstanding debt versus your present income” ratio should, ideally be below 20% to get a higher credit score.
- Length of Credit History
The average age of all your accounts and the oldest account that you have, is used to determine the length of your credit history. The longer the period of time that you have a good credit history, the better it is for your score.
- Types of Credit Used
A variety of well managed credit accounts are proof that you have a good strategy in dealing with credit and will be able to handle additional loans equally well. An example of a good mix would include a credit card (revolving), a home loan (secured), and a student loan (installment), all with good payment histories.
- Pursuit of New Credit
Frequent applications for credit and many inquiries on your behalf, will impact your score negatively, especially, if you do not have a long credit history.
What does the Credit Score Say?
Excellent (780+) – If your credit score is 780+ you are eligible for the best mortgage interest rates and most likely to get your loans approved.
Very Good (720-779) – This is almost as good as the Excellent scores and will entitle you to some of the best loan rates.
Average (680-719) – If your score is in the average range then the interest rates that you will get, will be a bit higher than for those in the excellent and very good score range.
Poor (580-679) – If your score is in this range then you will face some difficulty in getting your loans approved. In case your loans are approved, you will have to pay a high rate of interest.
Very Poor (579 or less) – If scores are in this range then it is extremely difficult that the loan will be approved, but there is a possibility for the credit to be repaired. Advice from an experienced mortgage broker can help you repair your credit.
Can I improve my Credit Score?
Credit scores can fluctuate over time- they can go up or down, depending on how well you are performing in the different parameters as mentioned above. Therefore if you are planning to apply for another loan or mortgage in the future, you should be diligent about making payments on time for your current loans. Secondly decreasing your overall debts will help your scores to go up significantly.