How your credit score is calculated

If you are applying for credit, you may already be aware that you need a good credit score in order to qualify, but do you know how your credit score is actually calculated?

how your credit score is calculated

“If you have been turned down for credit, or if you are curious about how you can improve your credit score, the first step is to understand how it is calculated,” says Jeff Schwartz, executive director, Consolidated Credit Counseling Services of Canada.c

“When you understand the criteria and how each of the factors weighs in to your overall credit score, you can focus your attention on specific steps to improve your credit score,” says Schwartz.

Here is what you need to know about your credit score.

What is a credit score?

Your credit score is a number that is assigned to you, based on information on your credit report. The information on your credit report reflects how well you’ve handled credit in the past. The lenders use this information as an assessment of risk when lending to you in the future. The credit score number that you are assigned is used by lenders to determine if you qualify for credit. They will also use it to determine what kind of interest rate you’ll have to pay and if there are any other conditions that are attached to the debt that you are taking out.

What is a good credit score?

A good credit score can range on the low end from 300 to a high of 900. For most lenders, a score of 650 is the baseline for qualifying for credit. Anything below that magic number and you may have trouble getting credit from traditional lenders.

What are the factors that influence the credit score?

The weighing of these factors differs slightly from agency to agency, but basically, your credit gets broken down like this:

Your payment history carries the bulk of influence on your credit score, usually about 35 per cent. If you pay your bills on time, this can really help to increase your score. However if you are late (or even worse, habitually late) this will cause your score to drop significantly.

How much do you owe? Are you maxed out? If you’ve got multiple debts and they are all close to the limits, it will pull your score down.  Are you carrying a significant amount of other debt? If you already have a lot of debt obligations, it means that you are a greater risk to lend more money to, hence the lower score. This also accounts for a good chunk of your score (generally in the range of 30 per cent).

Your credit score in influenced by the following criteria, but to a lesser degree:

How long is your credit history? If you are just starting out with credit, you won’t have a lengthy (if any) credit history. This makes it difficult for lenders to determine how well you’ll do with credit, so you get a lower score until you can prove your credit worthiness over time.

Do you have a number of recent inquiries? If you’ve got a number of inquiries in a short period of time, this is a flag for lenders. It looks as though you’ve been shopping around to many lenders and possibly have been turned down already.

What type of credit do you have? If you’ve only got one type of credit, it can harm your credit score. Revolving credit (i.e. your credit cards and lines of credit) works differently than installment credit (i.e. your car loans, etc.). With revolving credit, your payments will fluctuate and you will have the option to re-use the credit. With installment credit, your payments are set and you pay down the debt until it is gone. If you have only demonstrated your borrowing behaviour with one type of credit, that can lower your credit score.

Are you trying to establish a good credit score? Take charge today by paying those debts down. We can help. Call one of our trained credit counsellors at 1-888-294-3130 or get started with our online  debt analysis

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