Understanding Your Credit Score
When potential lenders are looking at your credit report, they see and consider a lot more than just your credit score.
General Credit Guidelines
30% Credit Utilization: How do you use your credit? Are you near or above your limit? It’s recommended you only use 35% of your available credit or you may see your score start to drop.
35% Payment History: Do you pay everything on time? No late payments? Your report will show if you’ve been:
Making your payments on time
30-59 days late
60-89 days late
90+ days late
15% Length of Credit History: thin credit can be just as bad as bad credit. Lenders like to see a history of borrowers being able to properly manage their credit.
10% Inquiries: How often are you having your credit pulled? If you’re thinking of applying for a mortgage in the near future, it is best to avoid having your credit pulled elsewhere. Credit will be pulled for:
Credit Card applications
Car loans / Car financing
Banks/Credit Unions when applying for loans
10% Type of Credit: what kind of credit are you using? Are they credit cards, personal loans, car loans etc. For example, a payday loan versus a car loan. When lender’s see a pay-day loan, this is an automatic red-flag and speaks to your financial situation. Additionally, having diverse forms of credit will improve your score such as a mix of credit cards, lines of credit, and/or a car loan.
Two Major Canadian Credit Bureaus: Equifax and TransUnion
Both credit bureaus have similar purposes, to provide a general overview/summary of your financial health. Although it’s common for the two bureaus to reflect different credit scores. Why?
Different Credit Scoring Models
Different bureaus use different algorithms to calculate your credit score based on the data accessible. For example, Equifax uses data dating back 81 months (~7 years) whereas TransUnion uses a 24-month period.
Reporting
A major part of the accuracy of your credit score depends on the reporting the bureaus receive from the agencies you use.
Different agencies submit data to the bureaus at different dates throughout the month, which may cause discrepancies based on when your monthly report is generated.
Some agencies report to only one bureau, whereas others report to both. So a particular loan may not appear on our Equifax report but will appear on the TransUnion report if accessed by the lender.
How Long Does Information Stay On Your Credit Report?
Different information can stay on your report for different periods of time. This period of time may vary depending on the reporting bureau.
Credit cards/loans: late/missed payments can stay on your report for up to 6 years
Credit Inquiries:
Equifax: 3 years
TransUnion: 6 years
Bankruptcy: will stay on your report for 6-7 years
Active/Closed Accounts
With Equifax, as long as your accounts are still active they will remain on your report. Closed accounts can be used for up to 10 years.
With TransUnion, regardless if the accounts are active or closed, they can access data for up to 20 years.
How To Boost Your Credit Score
The calculation of your credit score is a complex matter, especially due to the ambiguity of how the reporting bureau’s respective calculating algorithms work. The most important thing to note are the strategies to maintain and boost your credit score.
On Time Payments
The best way to do your part for your credit score is to keep track of your payment due dates and making your payments on time. Paying off your dues entirely is ideal, although making your minimum payments will still be marked as making your payment on time.
Using under 35% of your Credit Limit
As mentioned above, making the minimum payments will continue to mark your payment habits as on time. Although, if you are nearing or above your credit limit, this will still negatively impact your credit score. It’s recommended to only use up 35% of your available credit as this will show you are not relying on credit you cannot afford.
For example, if your credit limit is $6,000, it’s recommended to only use up to $2,100. It’s better to increase your limit and remain with the 35% utilization portion then to approach or go over your credit limit.
Limit Your Number of Hard Credit Inquiries
There are two types of credit inquiries: Hard inquiries and soft inquiries.
Hard Inquiries:
These inquiries affect your credit score. This can include credit cards, mortgages, or other loan applications. Typically whenever a hard inquiry is made, you will be required to approve the credit pull.
Soft Inquiries:
These inquiries do not affect your credit score. This would include checking your credit score with certain providers or applying for “pre-qualified” credit loans.
By getting into the good habits that will benefit your credit score, it will eventually be second nature and your financial future will thank you! If you are struggling to understand your credit score and are planning on purchasing property in the future, book a call with Weninger Mortgages and we can assist in strategy planning to put you in the best position to receive a mortgage approval. Don’t wait to get a handle on your credit - the best time was yesterday!
