Understanding your credit score

We often get asked questions about why a credit score is what it is and how to improve it. This usually happens when someone is trying to get a mortgage. If their credit score is low or damaged at that point, it is usually too late to fix it as often times it can take a minimum of a month up to a few years to fix depending on the severity of the damage. Understanding your credit score is important and this is why we recommend you come and see us even if you are just remotely thinking about getting a mortgage. We can determine if there are any problems with your credit and then work at fixing those as quickly as possible so you can get your mortgage when you want and need it.

Your credit score is an overall assessment of your financial wellbeing. It indicates the risk you represent for lenders as compared to other people. There are two main credit reporting agencies called Equifax and TransUnion and they use a scale from 300 to 900. The minimum score you need for a regular conventional mortgage is usually 600. If you don’t meet this minimum you may still be able to borrow money but at higher rates and with larger down payments. The higher your score the lower the risk for the lender. Lenders also have their own credit scoring systems and will sometimes use this in credit making decisions. Lenders must decide on the lowest score you can have and still borrow money from them. Sometimes they factor in your score to set the interest rate you will pay.

What factors influence your credit score?

Credit-reporting agencies use a formula to figure out your credit score. This formula takes into account various factors described in your credit report, such as the following:

• Your payment history: Do you carry over a balance on your credit card from month to month? Have you ever missed a payment on any of your debts? If so how late were you and how many times have you been late?
• Collection or bankruptcy recorded against you: Has a collection agency had to collect an unpaid bill from you? Have you ever been bankrupt?
• Outstanding debts: Is your spending close to your credit limit? If you owe greater than 75% of your credit limits then this will damage your score.
• Account history: How long have you had credit? The longer the better.
• Number of recent inquiries made about your credit report: How many times has someone inquired about your credit report?
• Type of credit you are using: Do you only have credit cards, or do you have a mix of credit cards and loans?

These factors do not all have the same weight in determining your credit score. The most important factors are your payment history, whether you have ever declared bankruptcy, and the amount of your outstanding credit balances. Although other elements such as your mortgage information and any personal inquiries you have made may also be included in your credit report, they usually do not influence your credit score.

How long do these factors affect your credit score?

Information that affects your credit score is usually removed from your credit report after a certain period of time (approximately 7 years). The length of time that information must stay in your report depends on the province where you live and the type of information.