Understanding Your Credit Score

Since reading our recent posts (here and here) on credit scores, hopefully most of you are now in the habit of regularly checking your credit reports. Once you’ve had the chance to review it, you might have a few questions, even if you don’t notice any mistakes.

One question might be: how is my credit score calculated?

The formulas used for calculating your credit score are proprietary to the credit score companies (Equifax & Transunion in Canada), so they unfortunately are unavailable to the public. This makes it hard to know how your actions affect your scores.

That being said, there are 5 main factors that are used in calculations:

1) Payment History
This is the most important factor. It includes when you paid bills, missed payments, collection agency activity, and bankruptcy. Obviously, missing payments or being late often can damage your score.

2) Use of Available Credit
This is the second most important factor. To figure out your available credit, add up the credit limits for all your credit products, such as credit cards, lines of credit and other loans.
What counts toward your credit score is how much of your available credit you actually use, not your credit limits by themselves.
When you use a large percentage of your available credit, lenders see you as a greater risk, even if you pay your balance in full by the due date.

3) Length of Credit History
The longer you have had a credit account open, and used it, the better for your score. If all your credit facilities are relatively new, this can adversely affect your score.

4) Number of Credit Inquiries
When lenders and others ask a credit reporting agency for your credit report, it is recorded as an inquiry. This usually happens when you apply for credit. It is normal and expected to seek credit every so often. But if there are too many inquiries on your credit report, lenders may be concerned. It can seem like you are desperately seeking credit or that you are trying to live beyond your means without the ability to pay back the money you want to borrow.

5) Types of Credit
Your score may be lower if you only have one type of credit product, such as a credit card. It is better to have a mix of different types of credit, such as a credit card, auto loan, line of credit or other loan. It can even help if you have a second but different type of credit card, such as an account with a store.

This is a bit of a complex calculation, but by breaking it down into these 5 factors, it makes it easier to understand.

Have your noticed how your actions have made a difference on your credit scores?

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Russel Lalovich
russel@lalovichrealestate.com
Office: (519) 966-0444
Cell: (519) 995-5620