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WHAT MAKES UP YOUR CREDIT SCORE?
Past Payment History - 35%
Any late payments, collections, judgments or liens will have
a negative affect. The older they get however, the lower the affect on your
score.
- Don't
be late on your payments. (Some lenders will give a grace period but even
one day late can be reported as late to the scoring companies)
- Even
if Canada Post doesn't deliver your bill you are responsible to find out
what your minimum payment is and ensure that it is paid by the due date.
- The
best way to do this is to have the minimum payment come directly out of
your bank account.
How Much You Owe - As a % of your available credit - 30%
- The
important thing to remember here is that the formula calculates how much
money you owe in proportion to your available limits.
- To
improve your score don't pay off one card at a time. Pay the card with the
highest percentage balance. Then continue paying them down all to 70%,
then to 60%, then to 50% etc.
- The
exception to this rule is if you have one card that charges 7% interest
and another that charges 29% interest. Obviously in the circumstance you
might want to pay off the higher interest card first. If however, the
interest rates are within a few points of each other, making payments on
the higher percentage balances first will help your score.
- Never
go over the available limit on a card, if you have a $1,000 limit and your
balance is $1,020. This is very bad for your credit score. The closer your
balances are to your limits the more negatively it affects your score.
MYTH - Closing out credit accounts will increase
your score - Many people in the financial field suggest that closing some
credit cards if you have too many will improve your credit score. The theory
behind this misconception is the more the available credit you have the higher
risk you are. Closing credit accounts will never improve your credit score
and will very often lower your score!!! Tell this one to everyone you know.
Closing out unused credit accounts increases the percentage of your available
credit that you are using. (if your
are using $1,500 and you have $10,000 available you are using only 15% of your
available credit. If you close out $8,000 of your credit and now have $2,000 in
available credit the $1,500 amounts to 75% of your available credit.)
In
some cases when a lender gives you a mortgage or other loan they will require
you to close out some credit accounts, as
a condition of the mortgage or loan, and in a case like this it must be
done to get the loan. The problem is that many bankers assume that must also
means that this improves your credit score. This is not the case. Opening too
many new accounts is not good for your score but the damage is done and will
not be rectified by closing those accounts.
Note - if your card is stolen or someone has gained access to it or you are simply
bad with credit card spending it might be best to close out the credit
accounts. But do not do it if the sole reason is to improve your score because
it will not and can often have a negative affect.
Length of Time Credit Has
Been Established - 15%
- The
longer credit accounts have been open and in good standing, the better.
- If you
are opening new accounts to pay off old accounts or "credit surfing"
this creates concern for lenders and can negatively affect your score.
- TIP:
keep your oldest accounts active - even if you only use them once a year
and pay them off right away. If they are inactive for to long the credit
grantor might close them down.
Inquires - How often you apply
for credit and the Time Period of your inquires - 10%
- Looking
for new credit often can result in having too many inquiries on your
bureau in a short period of time. This will be seen as "shopping for
credit" and can be indicative of a higher risk.
- Opening
too many accounts in a relatively short period of time can be seen as a
potential risk as well.
- Promotional
or administrative inquiries (i.e. Credit grantor updates) will show on
your report but do not affect the credit score.
MYTH - Shopping for loans at a few different banks will damage your credit
score
If you use a
mortgage broker they can pull your credit once and use the same report to shop
all of the lenders for you. Also, the
scoring system gives a two-week window to allow you to shop different lenders
for major purchases like car loans and mortgages. Sometimes Bankers will try to
scare you away from shopping other banks by telling you it will harm your
score. As long as it is within a two-week period it counts as one inquiry.
Your types of Credit - 10%
Finance company accounts score lower than
traditional banking or retail accounts.
- Deferred
payment options funded by finance companies impact the score accordingly.
Too many of these "buy now, pay later" accounts could be interpreted as a
potential for future risk. Even if you pay these accounts off before any
interest is charged it is still viewed poorly because most people don't.
- Lenders
typically like to see some installment loans as well as some revolving
credit to see how you can manage different types of credit.
- The
Installment loans don't have to be current as long as they are still
showing on your report.
- Lenders
do like to see active credit. You don't have to carry balances but ensure
that you have a card that you use from time to time.
MYTH - You have to pay interest to
have a good score
Lenders do like
to see active credit; however, you can pay off your balance each month and not
pay interest and you will still have active credit.
For more information,
contact Layne Walters
403.466.5363 or email: layne@yourmortgageteam.ca
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