Understanding Your Credit Score

28 October 2014

Understanding Your Credit Score

We all know it’s important to maintain a good credit score but what exactly goes into your score.

A credit score is a number, attached to your credit report, that represents your credit-worthiness and indicates how likely or unlikely you are to pay your debts.  Lenders, such as banks and credit card companies, use credit scores to evaluate the potential risk posed by lending money to you.  The higher the score the more likely you are to be approved for credit; a lower score decreases your chances of obtaining credit.

The credit score is a complicated formula that is influenced by the information contained in your credit report, such as:

Inquiries
Each time a lender checks your credit an inquiry is recorded.  Too many inquiries could be an indication of heavy reliance on credit and will bring down your credit score.

Types of Credit
The most common types or debts are bank and credit union loans, lines of credit and credit cards.  Some other types include store credit cards, finance company loans, student loans and cell phone contracts.  Heavy borrowing from riskier types of lenders such as finance companies can reduce your credit score.

Balance/Credit Limit
If your credit cards or lines of credit are always “maxed out” this will have a negative impact on your credit score.   If possible, always pay your credit cards in full each month.

Payment History
Each individual loan or credit card shows your payment history for the last 5 years.  A loan is typically reported as “I” meaning instalment loan, and credit cards as “R” meaning revolving charge accounts.  If you have a record of consistently late payments it will lower your credit rating and lenders will see you as a high risk.   A history of late payments will lower your credit score but you can fix this over time by making your payments on time.

Public Records
The following are examples of information that are contained in public records:

Consumer Proposals or Credit Counselling
Indicates when a third party has intervened on your behalf and has offered your creditors a payment plan to help you reduce your debt obligations.  The rating for debts included in these programs is “R-7”.  Once paid in full it will take 3 years for these ratings to clear off your credit report.

Repossessions
When a secured loan such as a vehicle loan goes unpaid the lender has the right to take back their security, sell it and apply the proceeds to pay down the loan.   Repossessions, whether you give up the vehicle voluntarily or not, are rated as “I-8”.

Bankruptcy
When a consumer can no longer pay his or her debt obligations a bankruptcy is often necessary.  The rating for debts included in bankruptcy is “R-9” and it takes 7 years (14 years for a 2nd time bankrupt) from the discharge date for the information to be cleared off your credit report.

Collections
Loans or credit cards that go several months past due are often assigned to a third-party collection agency.

Court Actions
When a creditor takes action to get a court judgment against you and your assets the information will get recorded on your credit file.  A judgment prevents you from purchasing or refinancing a home until the debt is settled.

Here a few tips to maintain a healthy credit rating:

  • Avoid frequent credit applications and only apply for credit when necessary
  • Make your monthly payments on or before the due date
  • Pay your credit card balances in full each month
  • Avoid using credit for everyday expenses and keep your balances to a minimum
  • Try to avoid carrying multiple credit cards.  One card with a reasonable limit should be sufficient

For a free consultation over the phone or in person in Saint John, Moncton, Fredericton or Charlottetown, please contact us.  Powell Associates Ltd. is a licensed insolvency trustee focused on providing debt settlement, proposal and bankruptcy solutions for individuals and businesses.