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Credit as a Second Language
If you’re someone who finds the whole business of understanding your credit score to be confusing, you’re far from alone. Many people wonder how the credit bureaus can boil down your history of making payments down to a single number — and how that number never quite seems to be the same from one bureau to the next — and how the number comes out differently when mortgage lenders get their report and when other types of lenders run the report.
Understanding Your Credit Score
In Canada, the two major credit agencies are Equifax and TransUnion. Credit scores range from 300 up to 900. The magic number with standard loans tends to be 650. A Score above 650 will generally qualify most individuals for standard loans provided the income and other factors meet the grantors requirements. It is when the score is less than 650 that it tends to be a bit more difficult. Each bureau has its own formula — and each type of lender weighs different types of transactions, and different types of delinquencies, in a slightly different way. Understanding how your credit works is important and, while the exact formulas are proprietary, there is enough information out there to help you remain in control of your financial future.
First of all, when you look at your credit report, if you print out the whole thing, you’ll see a list of all of the credit accounts that you have opened and that have reported to the major credit bureaus. This is true for loans that you’ve taken out and paid off, credit cards you opened 20 years ago and still maintain today. Your payment record for each of those items appears on that report.
If you make your payments on time, and the creditor keeps reporting you as a punctual payer, then those items won’t affect your credit score, so long as you don’t allow your balances on your credit scores to stay too high (that ends up costing you a lot of interest money as well). However, if your payments are on time, your credit score remains high.
If you fall behind, though, your creditors also will report that, and that item stays on your report. If you declare bankruptcy, it stays on your report for six years after the discharge date. If an account goes into collections, that stays there for six years from the last activity date. If you’ve taken out a secured loan, that stays on there for six years. “Hard” inquiries from lenders stay on there for three years. Those aren’t necessarily bad things, but if your’e having too many of these inquiries done, that can push your score down.
Carrying high balances will also cause harm on your credit. Ideally, using no more than 25% of your available credit will help your score. Once you have exceeded 50% of the available credit, your score will be negatively affected. Use your credit wisely, and don’t become dependent on it or it will cost you. A lower credit score means higher rates and less favorable terms for future loans. Some additional factors that will influence your credit score the most: late payments, incidence of delinquency (including bankruptcy), not having enough credit accounts — or too many, particularly if they all carry balances.
Also, if you change jobs a lot and haven’t had a long time of residence at your current address — or if the credit bureaus simply don’t know your housing status (owning vs. renting), that can hurt your score. One factor that you can control immediately has to do with errors. This is why it’s important to keep an eye on your credit report. If you track it regularly, you can dispute items that you don’t believe are actually your responsibility. The credit bureaus are legally bound to investigate any disputed items and remove them — and adjust your score accordingly — if it’s incorrect. That’s one part of the credit score lingo that most clients love to read!
It is very important to stay on top of your credit, because errors can be the difference between an approval and a lender decline… A great rate vs a fair rate vs a poor rate. Common errors include:
- Wrong mailing address
- Incorrect Social Insurance Number
- Signs of Identity Theft
- Errors in your credit accounts
- Late payments
- Unauthorized hard inquires
If you have some issues and do not want to take on the task alone, Amansad Financial Services can refer you to various sources that assist customers improve and repair credit.
Credit Score Fiction: Myths that You Might Believe
Because your credit score is so important when it comes to gaining access to financing for everything from a basic credit card to securing a home mortgage, many people have come to believe many different horror stories about how it works, to the point where many people fear the credit bureaus and don’t even want to see their scores.
While it’s true that your credit score is important, not keeping up with it is definitely a poor choice. Smart money management includes tracking your credit scores at least monthly to ensure that no errors have been made with your score — identity theft is a reality, and with that can come huge credit accounts that you didn’t even know you had. Sometimes creditors make mistakes — and so do the credit bureaus.
With that, there are some other common beliefs about credit scores that we can help you dispense with.
#1 Bankruptcy ruins your credit score forever.
First of all, this isn’t true. Bankruptcy does stay on your credit report for at least six years, depending on the province where you live. After that, though, the bankruptcy and the other bad debts vanish, bringing your credit score back up. During those years, though, getting access to home mortgages is difficult, especially through traditional sources.
#2 Higher salary means a higher score.
This isn’t true, because your credit score doesn’t have anything to do with what you bring in. Rather, it has to do with how you handle your money once you get it. If you show that you can manage it, no matter what your salary is, then your credit score will be higher. Some lenders do look at job stability (how often do you change employers?) but that’s not part of the score. Credit reporting agencies may have your occupation and employer, but those are not part of the calculation.
#3 Checking your credit score hurts your score.
When you pull up your own score, this is called a “soft” inquiry by the agencies. It has no influence at all on your credit rating. When creditors and lenders look at your report, that is sometimes considered a “hard” inquiry, depending on how much information they ask for, and if those become numerous, that can influence your credit score negatively. But you can check as often as you like without influencing the score at all.
#4 No debt means a perfect score.
Ironically, being debt-free is not the way to get a perfect credit score. The agencies still rate on your past payment history. The best way is to get debt-free, and then open up a couple of lines of credit, such as credit cards, and keep that balance paid in full each month.
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