RateSupermarket.ca asked:


 

Ask any Canadian who has gone through the home buying process what score is more important – last night’s NHL results or their Beacon Score – and they’ll most likely respond, “the Beacon Score of course!”. The reason being that a Beacon Score is one of the credit scores that lender’s use to measure a borrowers’ risk based on a valuation of their financial history including details on credit cards, charge cards, loans, mortgages and overall payment history.

 

 

 

In Canada, 3 private company’s generate almost all the credit scores – Equifax, Trans Union and Experian. Though all 3 bureaus offer FICO (Fair Isaac Credit Organization) scores using the formula developed by Fair and Isaac, each has its own brand name - Equifax calls it the Beacon Credit Score, Trans Union has the FICO score and Experian uses the Fair, Isaac Risk Model.

 

 

 

A high credit score is an important factor in applying and securing the mortgage and mortgage rate of your choice. It also makes it easier for an individual to get credit cards and loans on favorable terms, sometimes even with instant approvals. The higher your score, the lower the interest rate! The difference between a good and bad score can increase the cost of a loan by 3% or more.

 

 

 

Equifax is the most popular credit score used by lenders and results range from 300 to 900. The break-up is as follows:

 

 

 

35% of the total score is based on payment history

 

 

30% is the amount owed and the available credit

 

 

15% is for length of credit history

 

 

10% is for types of credit used

 

 

10% is for search and acquisition of new credit and inquiries

 

 

 

A common misperception is that all inquiries will negatively impact your score instantly. The reality is that this may happen but its not a given and depends on your overall credit profile. The first inquiry can result in a drop of 5 to 20 points on the first mortgage inquiry, and will usually have a larger impact on the score for consumers with limited credit history and on consumers with previous late payments, but it’s different in every case.

 

 

 

Factors that affect your credit score

 

1. You have a short credit history

 

 

Age of your credit on revolving or non-revolving accounts also affects your credit score. Revolving accounts are credit cards such as Visa, MasterCard, or retail store card that allow you to make a minimum monthly payment and “revolve” the remainder of their balance over to the next month.

Non-revolving accounts include cards such as American Express and Diners Club and must be paid off in full each month.

 

 

 

Research shows that consumers with longer credit histories have better repayment risk than those with shorter credit histories. Also, consumers who frequently open new accounts have greater repayment risk than those who do not.

 

 

 

If you can maintain low balances and make sure your payments are on time, your score should improve as your revolving credit history ages.

 

 

2. You’ve been looking for credit in the past year

 

 

If you’ve been recently been seeking credit, this is evident on your credit file based on the number of inquiries in the past 12 months. Research shows that consumers who are seeking new credit accounts are riskier than consumers who are not seeking credit.

 

 

 

There are both credit and non-credit inquiries on the report and the score only considers those related to credit applications. Inquiries such as your bank reviewing your account or you requesting a copy of your own report are not considered.

 

 

 

The scores can identify “rate shopping” so that one credit search leading to multiple inquiries being reported is usually only counted as a single inquiry. For most consumers, a few inquiries on your credit file has a limited impact on FICO scores and the best advice is to only apply for credit when you need it.

 

 

3. Not paying off your loans

 

If you have installment loans and owe money on them, this does not mean you are a high-risk borrower. Paying down these installment loans is very positive as it shows that you are willing and able to manage and repay debt, and a successful repayment history is good for your credit rating.

 

 

 

One measurement is to compare outstanding loan balances against the original loan amounts. If you took out a $1,000 line of credit 1 year ago and still owe $925, this shows that you may be having trouble paying off the debt. Generally, the closer the loans are to being fully paid off, the better the score. This metric has limited influence on the FICO score.

 

 

 

Paying off loans on a timely basis reflects well on your credit score, but if you really want to improve it, try to pay the loans, (especially non-mortgage debt) as quickly possible.

 

 

4. Non-mortgage debt is too high

 

Consumers with larger credit amounts have a greater future repayment risk than those who owe less, resulting in the score measuring how much non-mortgage related debt you have.

 

 

 

The total outstanding balance on your last credit card statement is generally the amount that will show in your credit bureau report. Even if you pay these off in full each month, your credit bureau report may show the last billing statement balance.

 

 

 

Paying off your debts and maintaining low balances will help to improve your credit score. Consolidating or moving your debt into one account will usually not, however, raise your score, since the same amount is still owed.

 

 

 

Bankruptcy on the credit report is a borrower’s worst nightmare, as it stays on record for almost 10 years and reduces your score by 200 points or more.

 

 

Top tips to improve your credit score

 

1. Review your credit report at least once a year

2. Contact your creditors or the credit reporting agency to have errors on your credit profile corrected

3. Apply for credit only when you need it

4. Keep balances below 50% on your credit cards

5. Pay off non-mortgage debt on time as quickly as possible

 

 

 

Martin Lukac asked:


Do you know what your credit score is? Many people understand that they have a credit score, but they don’t really know how it is actually calculated. If you want to improve your score or maintain good credit you should know how credit scoring works.

Credit scoring is the way that lenders determine how likely you are to pay back the money you borrow. It basically represents you risk level. The lower your score, the higher a risk you are to a lender. The higher your score, the less of a risk you will default on a loan.

With good credit comes low interest rates and favorable terms. Your credit score will determine much more than interest rates. Lenders, landlords, cellular companies and even your insurance company will look at your credit score in determining whether or not to do business with you. If you have a low credit score, you may pay higher insurance premiums and have a harder time borrowing money.

You’ve probably heard of your credit score called a FICO score. This is the score based on the Fair Isaac & Co. credit scoring model. These scores are based only on the information found in your credit report. FICO is not the only type of score out there. You can have a different credit score from each of the three major credit reporting agencies. It is possible to see as much as a 50 point difference between two scoring sources.

There are five major factors that go into your credit score. They are weighted differently, so some parts appear more important than others. However, they all will affect your final score.

1. Payment History

Your payment history makes up 35% of your total credit score. Your payment history considers whether you pay your bills on time or are late making payments. It will look at the frequency of late payments and how far behind you are on payments. How many accounts do you pay on time? Have you had major credit problems or filed for bankruptcy? Paying your bills on time each month will raise your credit score.

2. Amount Owed

The amount you owe will determine 30% of your total credit score. This section looks at the total amount you owe and what types of accounts you have open. Do you have large balances on all of your accounts? How much available credit do you have in comparison to the amount you owe? How much have you paid down on your accounts since they were originally opened? Paying your accounts down responsibly and not having high balances on your credit cards can raise your score.

3. Length of Credit History

The length of your credit history will result in 15% of your credit score. The longer your credit history, the higher your score. How long you’ve had certain credit accounts open will affect your score, as well as how long it has been since you’ve used your accounts.

4. New Credit Accounts

Ten percent of your score is based on how many new credit accounts you’ve established. How many new accounts have you recently opened? How many requests for your credit have been made? How long ago where you shopping for credit? Rate shopping usually will not hurt your score if they are made within a short period of time.

5. Overall Mix of Credit

The final 10% of your credit score is based onn the mix of credit you have — credit cards, installment loans, mortgage loans, secured loans, etc. The more balanced you are, the higher your overall score in this area will be. You want to have a mix of all types of credit.

There are several ways to improve your credit score. Start by paying your bills on time. This is the one factor that will make the most impact on your credit score. Pay down your debt and limit your applications for new credit. You should also check your credit report and take the time to correct any inaccuracies.