Now more than ever, people need to be vigilant with how they handle their credit. With Equifax’s new scoring system that came out this year, a missed payment can hinder your credit score.
With a range from 300 to 900, your credit score captures your perceived lending risk at a moment in time. Your score tells lenders what kind of risk you are likely to be as a borrower.
Your score can change from month to month. The companies that hold your credit and loan accounts report monthly transactions to credit bureaus. This is beneficial to you because it means you can improve your score with the right credit “behaviours.”
1. Previous payment history (approximately 35 per cent of score)
Your track record of paying your credit accounts on time is the most heavily weighted attribute. Events such as late payments, collections, judgments, liens, foreclosures, bankruptcies and wage attachments are part of this category and considered quite serious. More recent events and large amounts will affect your score more than older events and small amounts.
2. Current level of indebtedness (approximately 30 per cent of score)
This portion of the score considers whether you are overextended or not. Too many credit cards or keeping your accounts at or near their maximum limit can signal that you don’t manage credit responsibly, and that you may have trouble making payments in the future.
3. Length of credit history (approximately 15 per cent of score)
The longer you have had credit in good standing the lower the risk indicators. This score considers the age of your oldest account and an average age of all of your accounts. New accounts will therefore lower your average account age.
4. Pursuit of new credit (approximately 10 per cent of score)
Opening several credit accounts in a short period of time is a risk indicator. The number of enquiries done on your behalf can also have an effect. However, credit scores try to differentiate between rate shopping for a single loan and searching for many new credit accounts. This can help avoid collections, which has a negative impact on your credit score for a long period of time.
5. Types of credit available (approximately 10 per cent of score)
This attribute considers the mix of credit accounts you have: credit cards, retail accounts, instalment loans, accounts with finance companies and your mortgage. The goal is to determine if you have a healthy mix of credit. For instance, having a car loan, mortgage and credit card is more positive than a concentration of debt in only credit cards.
Benefits of a credit score Above 750
• Lenders offer a quick approval at the best possible rates
• This score says the person is reliable and responsible with debt
Challenges of a credit score below 620
• You could pay a premium on your borrowing rate
• You may find it difficult to qualify for a mortgage
Cait Holmes is a mortgage broker in Powell River.