Credit. It’s rare in today’s world to come across someone who doesn’t need it. Most people rely on credit to help fund an objective such as purchasing a home or vehicle, opening a business, buying electronics, or even groceries. Not everyone can be given credit. Before considering a purchase where you will need to borrow money, it is good to consider what your credit score is and how it will affect your ability to get credit.

WHAT IS A CREDIT SCORE?

A main factor a lender considers before approving credit is your credit score. A credit score assigns a number between 300-900 which shows how you have treated and used credit in the past and plays a major role in determining how much of a loan you qualify for, and the interest rate offered. So, what makes a credit score? A credit score is determined by five weighted categories.

Payment history

Payment history makes up the largest component of a credit score at 35%. Every source of credit (apart from your mortgage) and how you pay is monitored.

• Have your payments been on time as agreed by the terms of the loan?
• Are any payments deferred or temporarily not required like a student loan?
• Are payments past due and if so, how often has this happened?

As you can imagine, late payments negatively affect on your score. The later you are the worse the impact on your score. Red flags also include accounts that have been sent to collections, debt settlements, bankruptcies, or foreclosures.

The time since a negative event is also considered. A series of payments missed on a credit card 6 years ago has less risk than one significant missed payment in the last year.

Tip 1 – Pay on Time
You can increase your credit score by making payments on time and in full even if it is the minimum amount to service the loan.

How much you owe

Weighing in at 30% of your credit score is how much you owe. Lenders want to make sure you will make your payments and on time. Owing more than half of the available credit given is typically viewed negatively leading lenders to think you may be less likely to handle more debt. How much credit used compared to the original amount that was approved is also a factor. For example, an individual who has a $1000 credit card limit but continuously uses $200 or less is less of a risk than someone with a larger limit of $5000 and uses $4000 of the available limit.

Tip 2 – Keep Your Credit Use Low
To help boost your credit score, try to stay below 30% of the approved loan amount.

The length of your credit history

Credit history duration makes 15% of a credit score showing that only time can give a correct representation of how responsible someone is with their credit. Data is collected and monitored from when you were first approved for the credit, how long each credit item has been reporting, and if it is active. Whether the usage has been good or bad, information only stays on a credit score for up to seven years. Credit history weighs in at 15% because borrowers with a short history can still prove they are responsible with their credit behaviour.

Tip 3 –  Keep Your old Accounts Open
Once your credit is paid off, keep the account open to show it is available but not being used.

How many times you have applied

New credit application accounts for 10% of a credit score. This includes the amount of times your credit has been checked, how many recent accounts have been opened, and the amount of time between opening new accounts. This has a negative affect if you are frequently applying and/or increasing your credit portraying cash flow problems. Applying for credit can trigger a lender to do what is called a hard pull. A hard pull is done during the underwriting process to check the borrower’s full credit information. Too many hard pulls in a short time temporarily reduces your credit score. A soft pull can be done by you, the borrower, and is less encompassing of your credit picture but gives a rough ballpark about where you are at and will not affect your credit score.

Tip 4 – Limit Applying for New Accounts
Applying for new credit usually triggers a hard inquiry which will lower your credit score.

What type of credit you have used

Lastly, the types of credit used makes up the remaining 10% of the score and is the least significant. Deferred payment plans, consolidated loans, and lines of credit all can give a lender a different perspective of your credit behaviour. If you are smart with your finances and use credit only as you need it, you should not have to worry too much about this category. Do not go and open new accounts with the purpose of increasing your credit account types. Having diversified accounts doesn’t add to your score. Good behaviour with current accounts will give the greatest positive impact.

Tip 5 – Review Your Credit Reports
You can do a free soft pull yourself through resources like Equifax and TransUnion.

How to check your credit score

The Government of Canada link here keeps updated information on their website on how to access your credit report and credit score and provides links to two companies, Equifax and TransUnion, that provide your credit report for free online, by mail, by phone, or in person. Here are links to the two options:

• Access your free Equifax credit report
• Access your free TransUnion credit report (Consumer Disclosure)

Big picture

A credit score is continuously fluctuating. A person can score anywhere from 300 to 900 with anything above 650 being a good score. Along with your credit score, lenders consider income, job stability, assets, and why are you applying for the credit. It is good to be aware of these elements so that when you go and apply for a loan  you can ask yourself, “Are you worth the risk?”

Additional tips and information about credit scores.

http://www.mymoneycoach.ca/credit/check-credit-rating-report-score/what-is-a-credit-score

https://www.investopedia.com/articles/pf/10/credit-score-factors.asp