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20 Jul

Mythbusting Credit Scores

General

Posted by: Matt Evans

Credit Scores are one of life’s mysteries like Aliens, and the Bermuda Triangle.  Today I’m going to break it down so there is no more questions.

Having a great credit score can save you thousands of dollars, if you know how to manage it. There are two main agencies in Canada that report credit scores: Equifax and TransUnion. Both of these agencies collect information on a daily basis from millions of people through consumer credit agencies including phone companies, mortgage lenders, banks, credit card companies, and independent lenders.

Both of these companies analyze all the data they receive and use it to determine each individual’s credit score. To get a well-rounded credit score, you should have two active trade lines (borrowing accounts) in addition to a mortgage and cell phone plan.

Your Credit Score is determined with the following catagories.

35% Payment History

This portion looks at your payment deadlines and if you pay on time every month. The score from this section remains positive as long as you maintain set payments on fixed loans and always make at least the minimum payment on credit cards. This information is kept on file for 7 years from the date of last activity.

30% Utilization

This portion looks at the amount you use on your available lines of credit and credit cards. Ideally you do not surpass the 50% point on any of them, you should not exceed 70% usage.

15% Length of Credit History

For all financial lenders, a clear history for at least two years is the most favorable situation to show your security. This proves to the lender that you are a low risk applicant.

10% Credit Mix

The credit mix looks at your current loans and credit cards you use. Ideally, having at least one credit card with a $2500 limit and a fixed loan (i.e. house or vehicle) allows the lender to see your level of responsibility on different credit sources to base your score on.

10% Number of Inquires

This can be an area of concern if you frequently inquire about credit opportunities.  If you apply for multiple credit cards, an overdraft on a bank account, and/or a line of credit it can be a red flag that you are experiencing difficulties. If you are just looking for a new method of credit do not worry as your score will only take a minor, temporary hit. If, however, you are constantly inquiring about credit options then your credit score will take a dive.

To learn about the status of your credit score you can request a report from either Equifax or TransUnion for a free copy. Writing to them will take a few weeks, so if you are strapped for time you can check out a website that will charge you a fee to see your credit report immediately. If you have any questions about credit scores contact us at Dominion Lending Centres and we can guide you through it!