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Know the Difference

In order to know what affects your credit score, it is important to know what it is, how it works, and the difference between a credit score and a credit report.

Canadian credit scores and credit reports are maintained by two major credit bureaus: Equifax and TransUnion Canada.

A credit report is a detailed credit history that is recorded by a least one of the major credit bureaus. Your credit report will contain personal information, including personal identification and employment information, as well as related financial information reported by companies that lend money to you and issue credit cards .

It will have a history of payments, credit accounts, and transactions, as well as public record information such as collections, judgements and bankruptcies. You may obtain your credit report for free as often as you like.

Credit reports are like a “snapshot” of your credit history to give a lender a quick view of your history. This is done with a number scale that depicts your credit worthiness.

The credit bureaus use a scale from 300 to 900. The higher your number is, the lower the risk is to the lender.

Credit scores are not provided with your free reports. You must pay a fee to obtain this information when going through one of the two major credit bureaus.

The Top 5 Factors That Could Affect Your Credit Score

1. Payment History

Pay your bills on time! Paying bills on time is one of the best ways to contribute to your credit health.

The percentage of paying bills on time is very important. Even missing a couple payments could affect your credit score. All bills are important to pay on time. This includes utility bills, loans and even cell phone bills.

2. Credit History

This is information about how you have maintained your credit over time.

How many hard inquiries are on your report? Some hard inquiries include loans, mortgages, credit cards, student loans and more.

Multiple hard inquiries can generally affect your credit score. Other things that will show in your credit history and can affect your credit score are collections, foreclosures, liens, and insolvencies.

Soft inquiries do not affect your credit score. Examples would be soft inquiries by insurance companies, employment, and companies that are checking to give you promotions.

3. Outstanding Debts and Credit Utilization

Having too much outstanding debt and high credit utilization are factors that can hurt your credit score.

Try not to run your balances up to your credit limit. Your open credit amount available compared to how much of your credit you have used can be calculated to a utilization percentage.

An example would be to take your credit card balance and divide it into the total NOT USED credit left on your card. For example, if you have a credit card limit of $5000, and you have $2000 as a balance, the difference not used yet is $3000. Take the $2000 and divide it into the $3000 and you have about a 66% utilization of your credit.

If your percentage is high and you have many outstanding debts, a lender may think you are spending more than you can afford. A good target percentage would be 30% or less.

4. Types of Credit

The types of credit you have could also impact your credit score.

Having different types of credit such as mortgages, line of credits, loans, credit cards will be a perfect mix and might have a more positive consideration to lenders then if you have just one type of credit. Remember, you should only apply for new credit when you really need it and can responsibly handle it.

5. Not Enough Recent Revolving Account Information on Your Credit Report

Using accounts regularly will show lenders that you take part of building a healthy credit score. If there is no data, then it will be hard to for lenders to see your behaviour in your history and therefore could impact your credit score.

The Bottom Line

Even after bankruptcy or a consumer proposal , you can maintain your credit history and work at building a good credit score. Some suggestions to get started would be:

• Be involved! It is important to take control of your information and understanding how credit decisions affect your bureaus.
• Make payments on time!
• Obtain your report at least once a year; change any incorrect information.
• Be patient. It will take time but stick with it.

If you are in financial trouble come visit us for a no obligation free consultation and begin to take control to financial freedom and repair.