Credit Scoring in Canada
There’s several myths and misinformation about credit scoring. Here are some facts that may help you to know how your score is calculated. The credit score, also referred to as a “FICO score,” or “Beacon score” is a mathematical formulae created by Fair, Isaac and Company. The credit score is used by most companies to decide if the applicant is a good credit risk or not. Equifax and Trans Union will calculate the numbers from the credit report and generate a number between 300 and 900.
A low score indicates a bad risk. A score of 700 or more puts the applicant in the lenders’ good books.
How scores are calculated:
|
Factor
|
Weight
|
Points
|
|
Payment History
Bankruptcies, late payments, past due accounts and wage attachments, collections, judgements
|
35%
|
315
|
|
Amounts Owed
Amount owed on accounts, proportion of balance to total credit limit
|
30%
|
270
|
|
Length of Credit History
Time since accounts opened, time since account activity
|
15%
|
135
|
|
New Credit
Number of recent credit inquiries, number of recently opened accounts
|
10%
|
90
|
|
Types of Credit
Number of various types of accounts (credit cards, retail cards, mortgage)
|
10%
|
90
|
|
Potential totals
|
100%
|
900
|
How You Can Improve Your Credit Score
- Order a copy of your credit report, review it carefully and correct any significant errors.
- Pay bills on time.
- If there is a questionable credit history, you could open a few new accounts and use them responsibly, paying them off on time.
- Avoid opening accounts without intention of using them. Having five or six of the same credit card type (e.g., Visa), is not favourable.
- Having a credit card or instalment loan can help boost a credit score, as long as the balance is not too high and as long as there are not too many at finance companies.
- Keep balances owing low in relation to available credit. If the credit limit is $10,000, keeping the balance below $2,500 (or 25 per cent of the limit) will improve the score. Balances of more than $7,500 (or 75 per cent of the limit) will decrease the score. Going over the limit has an even more negative effect.
- Pay off credit card debt instead of moving it around to lower rate cards. Moving balances to other credit cards (i.e., “balance transfer”) and closing an old account can hurt the score.
Knowing your score and how it’s calculated will help you to obtain the financing you need for a car or a home at the best interest rate. To find out more about credit scoring, contact an Independent Mortgage Consultant. This information is provided by Sean Binkley a Mortgage Consultant with Mortgage Intelligence. He can be reached at his office at 613-531-HOME (4663) x22 or on the web at www.applyforamortgage.ca
Sean Binkley
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