How Is Your Credit Score Calculated?

Credit rating always seems to be a mystery to many clients. Let’s breakdown the process and make it a little easier to understand.

Payment Record – Your payment record and history is obviously one of the most important factors in determining your credit score. Approximately 35 percent of your credit score is attributed to this category. Paying all of your accounts such as loans, credit cards, lines of credit, retail department store accounts; car loans, student loans, mortgages, etc. on a timely basis is crucial to a good credit score.

All public records and collection items such as bankruptcies, foreclosures, liens, judgments, and delinquencies reported to collection agencies are taken into consideration. Your credit report will include details on all late or missed payments, public record items, and collection items.

Simply, try to make all your payments on time, even if it’s just the minimum payment. If you have trouble remembering, enroll in an auto payment plan. You can arrange for them to take at least the minimum payment and always pay extra when available.

Balances on Accounts – Approximately 30 percent of your credit score is based on this category. As this category is heavily weighted, focus should be placed on it accordingly.

A good rule of thumb to follow: On any revolving credit, limit your spending to 50 percent of the limit or below. In other words, never spend more than 50 percent of the limit on the account.

Length of credit history – Approximately 7% of your credit rating is based on this category. How long your credit accounts have been established with each creditor is considered. Also, how long it has been since there was activity on each accounts and whether the account appears active or dormant.

How long it has been since a late payment, judgment, public record or other derogatory item has been reported on your credit file.

If you do have any derogatory items being reported on your bureau, there is not much you can do about eliminating them. However, ensure you pay off or settle any outstanding balances so they appear as paid and not outstanding. Once you have done so, work on re-establishing credit on current accounts and keeping your payments on time and balances below 50% of the limit. It is possible to have a good score even if you have derogatory items being reported. Simply, work on your present payment history and keeping your balances in check.

New Credit and Inquiries – Do you have a lot of new accounts, a lot of new inquiries? This may affect your credit score so be cautious.

If you are shopping for something, i.e. a mortgage, auto, multiple inquiries should not affect your credit score. Typically, these are treated as a single inquiry and will have little impact on the credit score.

If you apply for several different credit cards, lines of credit, etc. within a short period of time, multiple inquiries will appear on your report. Looking for new credit can equate with higher risk and may affect your score.

Have any questions, need any advice? Visit us at www.thefinancialforum.ca. Email us at mortgages@thefinancialforum.ca. Call us at (905) 265-0246.

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