Your Credit Score & Credit Rating

Your credit score is an important number. It’s how creditor and lenders quickly decide if you are creditworthy. Find out which actions hurt your credit score so you can stay away from them.  Canadians have 2 credit reporting agencies, Transunion and Equifax.    

You can check your own credit score and credit report with these agencies at any time. 

How Payment History Affects Your Credit Score = 35%

Payment history accounts for about 35 percent of your credit score (this will vary depending on the scoring agency). It makes sense that this would be a top factor, since someone with a long history is of never missing a payment is likely to continue to be a safe person to lend money to.

If you do have negative marks on your credit score, three factors will determine the size of the deduction to your credit score:

  1. Time Since The Event – how long ago did you miss a payment? If it was a long time ago, and you have a good payment history since that time, it will not affect your score very much. Whereas a recent missed payment will cost more against your credit scoring.
  2. Number of Missed Payments – obviously matters. One missed payment in ten years of good history won’t matter very much, but the more missed payments in your history, the more risky you are seen to be and this will be reflected in a lower debt score.
  3. How Bad Was The Blunder? – being late or missing one credit card payment is a small deduction.  If you defaulted on a payment or it went to collections, this has a very negative affect on your credit rating.

How Much You Currently Owe = 30%

If you think of your credit score as a kind of “worry index” for lenders, you’ll understand why how much of your possible credit you are using would be a concern for lenders.

Think of this aspect of credit score as a percentage. The amount you owe on all possible credit sources (credit cards, auto loans, home loans, your current mortgage and so on) divided by the total of all credit available to you.

How much you currently owe compared to your total available credit accounts for about 30% of your loan score. Knowing this straightforward measurement, to improve your score, simply pay down any loans and avoid the temptation to get cute and improve your ratio by getting a larger amount of “available credit”. As we’ll see in the next sections, this can actually hurt your credit score more than improve it.

In general people who have a debt scenario near to or at the limit of their credit are much more likely to default and therefore are given a lower credit score. If you are in this situation credit counseling, to develop a debt management plan, may be something worth considering to reverse the trend and lower your debt ratio.

How Long You Have Had Credit – 15%

This metric accounts for about 15% of your credit score, with favorable weight going to those who have had credit for the longest time. The reasoning behind using time as a credit score factor is because in time it is easier to establish patterns of behavior.

Even if someone has never had a credit incident (a late payment for example) but they have only had a credit card or loan for a short period of time, they may not have encountered any of the critical life events that can cause major stress.

Credit statistics show that people with the highest ratings for example, have not missed a payment even when they have lost their job or been ill for extended periods.

Your Last Application for Credit = 10%

The typical Canadian consumer last applied for some sort of new credit 18 months ago. Recent credit applications can indicate a “need” for money and needing money is a negative factor on your credit score.

Your last credit application date accounts for about 10% of your total score. In fact, even having many lenders check your credit score can have a negative impact on your credit score, so make sure you don’t authorize lenders or banks to “pull” your credit score unless you are in fact, seriously shopping for a loan or other credit instrument.

Ordering your own credit score report does not count as a negative on your actual credit score.

The Types of Credit You Are Using = 10%

In short there are two major types of credit: revolving and installment.

Installment loans are items like car loans and mortgages. Revolving are credit cards and the like where even if you pay them in full, you still retain the credit to use it again. Generally credit cards are seen as higher quality revolving credit, than department store cards. And mortgages are seen has higher quality installment credit as they are more difficult to obtain in Canada.

The type of credit you are using represents about 10% of your score, and a higher score is give to people with a blend of credit from various sources. This is seen as a reflection of trust, due to each credit card or loan being seen as an endorsement from a different company.

Credit Score Conclusions

It is clear when you read through the 5 credit score factors that they are derived from a statistical analysis of many years of loans versus default rate data. This is both good and bad. For the lenders it can be a fairly accurate predictor of the “typical” borrower’s behavior and for the consumer it does provide a clear roadmap for improving their credit score.

 Understanding  your Credit Rating

Some credit-reporting agencies report the lenders’ rating of each of your credit history items on a scale of 1 to 9. A rating of “1” means you pay your bills within 30 days of the due date. A rating of “9” means that you never pay your bills at all or that you have made a consumer debt repayment proposal to the lender. A letter will also appear in front of the number: for example, I2, O2, R2. The letter stands for the type of the credit you are using.

  • “I” means you were given credit on an installment basis, such as for a car loan, where you borrow money once and repay it in fixed amounts, on a regular basis, for a specific period of time until the loan is paid off.
  • “O” means you have open credit such as a line of credit, where you borrow money, as needed, up to a certain limit and the total balance is due at the end of each period. This category may also include student loans, for which the money may not be owing until you are out of school.
  • “R” means you have “revolving” credit, where you make regular payments in varying amounts depending on the balance of your account, and can then borrow more money up to your credit limit. Credit cards are a good example of “revolving” credit.1

Improving your Credit Rating after Bankruptcy or Consumer Proposal

Beware of companies claiming to be able to improve your credit rating.   Watch and correcting your credit rating is something you can do for free.  Errors in your credit bureau are easily repaired and there is no cost to doing this with either Transunion or Equifax.  External companies claiming to be able to repair your credit charge you to do the same thing you can do for free.

Rebuilding your credit takes time.  Here are the 4 easy steps to rebuilding your Credit.

1) Set your stage by getting all documents that your consumer proposal or bankrutpcy is completed.  Send these discharge certificates or full compliance certificates to the credit bureaus.  Keep them in your important documents as you will need them in the future when applying for credit.

2) Check your credit reports, both Transunion and Equifax will provide you copies of your credit bureau for free.  Check for errors and inaccuracies and follow the online steps to repair an inaccurate credit bureau.

3) Get New Credit, prepaid credit cards or a secured credit card are the easiest to obtain.  Use the card monthly, pay it off and keep the card active.  This will jump start your credit bureau rating.

4) Be a depenable customer.  Pay your bills, on time, in full, every month. With no exceptions.

5) Spend less than you earn.  Although this seems obvious, building credit will require you to build a savings as well.

Following these 5 steps will increase your credit rating and credit score within 2 years.  Your credit score will be in better shape than before you filed bankruptcy or your consumer proposal.

For more information from the Government of Canada on your Credit Score