What is a credit score?
A credit score is an objective summary of the information contained in your credit report at a particular point in time.
If you have any credit accounts, such as credit cards, mortgage or loans, you likely have a credit report. Your credit report is a record of how you manage your credit obligations. This data is then distilled and calculated to create your credit score.
Your credit score is a number that lenders may use to help them decide whether or not to extend you credit. It represents the risk related to whether or not they can expect you to repay, according to the agreement you sign with them.
Credit scores can give lenders a quick, objective and impartial snapshot of a credit file and are helpful in making approval decisions.
How is my credit score calculated?
The score is a three-digit number that lenders use to help them make decisions. Lenders use scores to determine whether or not to grant credit, and if so, how much credit and at what rate. A higher score indicates that the individual is a lower credit risk.
To calculate a score, numerical weights are placed on different aspects of your credit file and a mathematical formula is used to arrive at a final credit score. TransUnion calculates your credit score based on many factors in your credit history and payment behaviour, including but not limited to:
While the overall purpose of credit scores is universal, each lender will use his or her own criteria to measure an individual’s credit worthiness.
It can be confusing when your score seems high but you are denied credit. Chances are you're not looking at the same score as your bank or finance company or they had other contributing factors involved in their decision, such as previous history with the institution. Subscribers don’t always work with both credit reporting agencies in Canada, so the information included in one report might be slightly different from the other. Some lenders also use their own internal credit scores when evaluating an application. The only way to find out about how they measure your creditworthiness is to ask the individual lender.
What is a good score?
Typically, the higher the score the better. Each lender decides which credit score range it considers a good or poor credit risk. The lender is your best source of information about how your credit score relates to their final credit decision. Your credit score is only one component of the information that lenders use to evaluate credit risks
What affects my credit score the most?
Your payment history is typically the most important aspect of your credit score. It shows how you’ve managed your finances. Your credit history is also very important, as it demonstrates how long you've been managing your accounts, when you made your last payments, and any recent charges.
What is my credit mix?
Your credit mix refers to the different types of credit you hold, such as credit cards, lines of credit and mortgages. In addition to your credit mix, the number of accounts you have also influences your credit score.
Will I be penalized for shopping around for the best interest rate?
A common misconception is that every inquiry decreases your credit score. This is not true. While an inquiry is recorded on your personal credit report every time you, one of your creditors or a potential creditor obtains your credit report, the presence of inquiries has only a small impact on your credit score. Many types of inquiries (such as employment, collection, insurance, rental, your inquiry into your own file and account review inquiries) have absolutely no impact.
Most scoring models take appropriate steps to avoid lowering your score because of multiple inquiries that might occur as you shop for the best car or home loan terms.
Understanding Your Credit Score
Determining your score is more complicated than just weighing the different aspects of your credit history. The credit scoring process involves comparing your information to other borrowers that are similar to you. This process considers a tremendous amount of information, and the result is your three-digit credit score number.
Remember, no one has just one credit score, because financial institutions use several scoring methods. For some credit scores, the amount you owe might have a larger impact on your score than payment history.
View all of your credit reports annually to help ensure the information is accurate. You may also want to use a credit monitoring service year-round. TransUnion offers some of the latest and most innovative credit monitoring services, to help you spot inaccuracies, potential fraud and other blemishes that could lead to higher interest rates.
Which personal details do not affect my credit score?
Your score is a representation of how you manage financial responsibility, not a testament to you as an individual. Things like age, ethnicity, religion, marital status, salary, occupation, and employer information are not factors in the calculation of your score.
How does an inquiry made by an insurance company impact my credit score?
It doesn’t. An inquiry made by an insurance company is considered a non-credit related inquiry or “soft” inquiry.
How do I build a good credit history?
A credit reporting agency needs a track record of how you’ve managed credit before it can calculate a credit score. Typically, six months' worth of activity will provide enough information to generate a score. Your score is dynamic and may rise or fall over time, based on how consistently and promptly you pay your bills.
Establishing a good credit history takes time. Each creditor has different requirements for issuing credit. If you are declined credit, contact the lender to determine the reasons why.
Start with a local store or a secured loan
If you have steady income and have used the same mailing address for at least one year, you may wish to apply for credit with a local business or department store, or for a secured loan or credit card through a financial institution. Paying credit obligations on time will help you develop a good credit history and may enable you to obtain additional credit in the future.
Consider a co-signer
If you have problems establishing credit, you may wish to ask a person with established credit to co-sign an application for you. This allows the creditor to base the decision on both of your credit histories. But remember, your co-signer is equally responsible for repayment of the debt. Both parties’ credit reports will reflect the payment history on this type of debt. Once you have proven that you are able to make timely payments, you may wish to apply for credit on your own.
How can I improve my credit score?
Several factors affect your credit score including payment history, amounts you owe, utilization of available credit, length of credit history, new credit and types of credit you use. Here are some tips on how to improve your credit score:
Pay all your bills on time. Late payments, collections and bankruptcies have the greatest negative effect on your credit score.
Check your credit report regularly
Take the necessary steps to remove inaccuracies - Don’t let your credit health suffer due to inaccurate information. If you find an inaccuracy on your credit report, contact the creditor associated with the account or the credit reporting agencies to correct it as soon as possible.
Watch your debt
Keep your account balances below 35% of your available credit. For instance, if you have a credit card with a $1,000 limit, you should try to keep the outstanding balance below $350.
Give yourself time
Time is one of the most significant factors to improve your credit score. Establish a long history of paying your bills on time and using credit responsibly. You may also want to keep the oldest account on your credit file open to lengthen your period of active credit use.