Your credit score is a judgement of your financial wellbeing, at a specific period of time. It indicates the risk to a lender, compared with other customers.
Your credit history file is maintained by at least one of Canada’s major credit reporting agencies: Equifax Canada and TransUnion Canada. These agencies use a scale from 300 to 900 to work out your credit score. Low scores on this scale mean that you have bad credit. The lower your score, the higher risk for the lender.
Whether you have good or bad credit, there are different ways of measuring your score. Some credit-reporting agencies report the lenders’ rating of each of your credit history items on a scale of 1-9. “1” means you pay your bills within 30 days while “9” means you don’t pay your bills. In a credit rating, the letter “I”, “O” or “R” will appear next to your score:
“I” – Installment: means you were given a loan on an installment basis, a car loan for exmaple.
“O” – Open: means you have open loan . A student line of credit is a good example of this.
“R” – Revolving: means you can borrow more money up to your credit limit and make regular payments in varying amounts depending on your account balance, like for a credit card.
How is your credit score calculated?
There are 5 key factors that are used to calculate and determine you have good or bad credit.
1. Payment History
Mostly importantly, creditors want to know if you are going to pay back the money you are asking to borrow. To do so, they take a look at your payment history – a record of all the payments you’ve made for your debts. Each time you make a credit card or line of credit, it is reported and recorded. Among other things, the report shows what accounts you have, whether or not you’ve paid as agreed and how often your payments have been late. The report also takes into account how late any payments or collection activities are. The more dated the information becomes, the less importance it holds.
2. How much is owed
Lenders take how much you already owe very seriously. Your existing payments will determine whether or not you can incur more debt. If you are near maxing out your credit card(s) or line of credit, you are therefore a higher risk to the lender. They also take into account how much of your available credit limits you use on an ongoing basis. If you usually use 75% or more, it impacts your credit score negatively.
3. Length of credit history
Yes, how long you’ve been using credit is taken into account. Creditors used time as a way to review how responsible you are with credit. The longer you’ve used credit, or had credit available to you, your credit report should provide a more accurate picture of how you use credit. If you have not used credit for a long time, it is difficult to tell if you know how to use credit responsibly.
4. New credit applications
Applying for new credit often can be a sign of financial difficulty. In the industry, people call this “credit shopping” and it reflects poorly on your credit score. The more new credit someone gets, the harder it is to keep up with all the payments. This part of the credit score takes into account the number of times your credit was checked in the last five years, the number of accounts you have open and how much time has passed since you opened any new accounts.
5. Types of credit use
Different types of credit shed light on how you handle your money overall. For example, deferred interest or payment plans can indicate that you can’t save up for purchases ahead of time. A line of credit can be risky as it is easy to get into trouble with a revolving credit instead of an installment credit where payments are for a set amount of years.
While the biggest two factors are payment history and how much you owe, being reckless with any of those five factors puts you at risk of having bad credit. This can close a lot of doors for you – you might not be able to get a credit card, student loan or cell phone contract. Some will even tell you that you won’t be able to finance a loan.
At Canada East Rides, we believe that every Maritimer has the right to own a vehicle regardless of their credit situation. We specialize in getting cars for people no matter their credit score. And we won’t stop there. We have partnerships in place to help you get your credit back on track. Get in touch to learn more.