What determines your credit score? –  And how to be proactive about improving it

An Equifax credit score is a valuable resource to you that is surprisingly misunderstood by many Canadians. Scores range from 300-900 while most mortgage lenders prefer a score above 650. Almost every time you need to apply for some sort of credit, a lender will pull your score. You can best prepare yourself to ensure you’re always granted access to the credit you need by understanding the strategy to maintaining a good score. The most crucial step to formulating a good credit strategy is developing an understanding of how your score is determined. This article will cover the 5 factors that make up your score and offer tips to keep your score high.

Payment History – 35% of your score

Equifax receives reporting from creditors in Canada regarding the timeliness of payments on a particular account. There are various codes for different types of credit, revolving, installment, and open all of which are paid differently. The timeliness of your payment is noted right next to the type of credit it is. A code of R1 for example means you pay within 1 month of receiving your statement. When you get to R2-R5 rating, you have not been paying your account on time and are penalized in your score for doing so. This realization gives rise to the number one rule of maintaining good credit. Always pay your bills on time.

Utilization – 30% of your score

The credit report also features the current balance of each account along with its high credit limit. The high credit limit refers to the maximum amount of credit you are allowed on that trade line. As your utilize proportionally more of the credit that is available to you on a single account, the system will negatively impact your score. Say you 2 lines of credit for $10,000 each and you need $9,000 to buy a car. It is a much better strategy to borrow a smaller proportion, say $4,500 from each line of credit as opposed to $9,000 from either one exclusively.

Length of Credit History – 15% of your score

The length of credit history refers to the amount of time you have been using credit facilities. If you’re new to Canada, or a young person looking to borrow money, you’ll want to make sure that you start to use credit as soon as it is available to you. Starting off with a credit card, secured with a deposit if need be, is a great way to build a strong credit file. Lenders are looking for mature credit, and the longer you operate within the good practices, the higher your score will soar.

New Credit Inquiries – 10% of your score

There is a very prevalent myth that pulling your credit is bad for your score. While this does hold some truth, for the majority of cases numerous credit pulls (3-4) in a short period of time are just fine. Different creditors are tagged by Equifax as offering certain products and the system has protocols to avoid penalizing you for multiple credit hits. A prime example of this is their process called de-duping, whereby credit hits coming from one agency multiple times is mitigated and does not adversely affect one’s score as much as is widely believed.  

Credit Mix – 10% of your score

Equifax notes that there is a strong correlation between consumers who have a diverse mix of credit facilities and those who pay reliably and on time. As I mentioned earlier there are different types of credit such as revolving, open, and installment, but there are also a wide variety of credit-offering companies. As part of a balanced credit profile, it is wise to use credit of different types and sources.

Take Aways

  • There is no quick fix to improving your credit, but time and best practices as mentioned here will help your score move up as quickly as possible
  • There are credit myths that you should be aware of so as not to be confused and stray from the optimal path
  • As a mortgage agent I’d be happy to pull your credit for free and walk you through it before you make a critical borrowing decision
  • No quick fix, but methods to make sure you’re building your score each month

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