How your credit score is determined

So one of the things that seems to cause the most confusion is the whole credit score issue.

This week we are going to take a look at this as having good credit can literally save you thousands of dollars but if you don’t know the basics of how it works then how can you manage this?

There are two main credit reporting agencies in Canada: Equifax and Transunion. They collect information on millions of users on a daily basis. This information is provided to them from a huge variety of consumer credit agencies who provide things like cell phones, mortgages, credit cards, lines of credit and loans – automotive, consolidation and overdraft.

From the data they receive they give each consumer a credit score. Ideally you will have two active trade lines in addition to your mortgage and your cell phone. A trade line can be a vehicle loan or a credit card. Your score is calculated based on the following percentages.

35% – payment history – you need to make the set payment on a fixed loan and at least the minimum payment on all of your credit cards. The credit bureau clearly shows your repayment history on all of your loans and this information is kept on your file for seven years from the date of the last activity.

30% – utilization – ideally you will not exceed 50% of the available credit on any lines of credit and/or credit cards you have. If you are at or near limit and applying for additional credit facilities it can be a red flag that you are experiencing financial difficulties.

15% – length of credit history – the magic number for mortgage lenders is 24 months. They love to see that you have two trade lines cleanly reporting for this length of time. Long standing, well taken care of credit cards are like music to the credit provider’s ears. It shows that you are long term reliable.

10% – credit mix – ideally you should have at least one credit card with a minimum limit of $2,500 along with another credit card or a fixed loan such as a vehicle. They need something to base your credit score on so if you have paid out a loan then make sure you still have two others reporting for you.

10% – number of inquiries – most people are very concerned about this particular aspect of their credit picture.

Most of us will go a full year or two between credit inquiries depending on how our life is rolling out.

The concern in this area would be if you apply for multiple new credit cards and a line of credit and a large overdraft on your chequing account.

You can see how this could look as though you are experiencing difficulties and need the additional credit to get through.

If you are an average consumer who is exploring their options for a large purchase then you do not need to worry. Your credit score can take the slight hit of multiple inquiries especially if all of the other items listed are strong.

You can write into either Equifax or Transunion for a free copy of your credit report at any time. This can take a few weeks though so there is always the option of going to the web sites.

For $23.95 plus GST you will get an immediate copy of your credit report including your credit score.

And there you have it, your credit score demystified. As always a well-qualified mortgage professional can help you through this and indeed all aspects of the mortgage world.

Pam Pikkert is a mortgage broker with Dominion Lending Centres – Regional Mortgage Group in Red Deer.

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