What does a credit score mean? The credit score is a calculation based on the individual repayment habits of people. The range is from approximately 300 – 900. So a score of 450 means that typically 450 of 900 people will pay back their bills on time.
It takes into account five broad areas:
- Payment History 35%
- Amount Owed 30%
- Length of History 15%
- Types of Credit Used 10%
- Applications for New Credit 10%
Payment History 35%
The most significant chunk of the report is your past. Creditors want proof that you’ll have the ability to pay them back regularly and on time. People do miss payment dates from time to time, so this is why you’ll need to separate yourself from the thousands of other applicants looking for money. I recommend scheduling a reminder for your bills or do an auto-payment system with your online banking.
Amount Owed 30%
All of your debt is looked at and your ability to repay it back. Some people who have applied were disappointed because they “felt like” they could accept more liability. Creditors are not concerned about your earnings but, instead of your debt load. They also look at how smart you are at paying it off monthly.
There’s some confusion among how to pay off debt. Some people say “I’ll just borrow a bunch now and pay just a little back, and it’ll be OK.” If you’re wondering why there’s not enough to go around and pay for the things you want?
“To get the things you’ve never had before you must do things you’ve never done before”
– Collin Sprake, Entrepreneur & President of Make Your Mark
To improve your score, you have to make more substantial repayments payments or seek debt relief. If you typically attempt to reduce the amount you owe, then you’re a better candidate for new credit.
Searching for New Credit 10%
If you’re always seeking new credit, this can affect your ability to get a loan. It may seem unfair as you’re uncertain about which lender is going to approve you but this typically affects people who are living off credit. They are using loans to pay off credit cards then using newly acquired debt to pay off the original loan, then search for more. For example, Mr. Dalilama has 15k in credit card debt; he gets a loan to pay off the 15k; he then seeks more credit to pay off the consolidated loan. This cycle persists for a short time until the creditors catch on.
Types of Credit Used 10%
Creditors give a ranking system for the kinds of debt you have. It is not advised to have too many just for the sake of credit rebuilding! Here they are in the following order:
- Car Loan
- Term/Installment Loan (includes student loans)
- Revolving Credit (Credit Cards/Line of Credit)
- Consolidation Loan
Creditors also have a list of debts that make them cautious:
- EI / Tax Garnishment
- Payday Loans
Length of Credit History 15%
Your creditors want to know how long you’ve been keeping current with your bills. The longer, the better. It’ll record the periods where you had difficulty paying your bills & how you overcame them. If you had no history, then it will make the lender more cautious about your application. Typically newcomers to Canada have trouble with getting new credit because of this.
Things Not Affecting Your Credit Score
Your credit score is typically not affected by mortgage payments, personal loans payments with friends & family; however, if you have a notarized debt and they report it to your credit bureau (Equifax or Transunion), it can show up. Phone bills & other utilities will not affect your score until they appear in collections. Any payday loans you have will not show up in your report until they go into collections.