Understanding Your Credit Score

With financial institutions continuing to tighten their lending requirements, it has become more important then ever to build and maintain a good credit history and subsequently a good credit score!

Your credit score is a representation of the information found in your credit history  and is used by lenders to determine if you are a good credit risk or not.  In general, lenders use this score based on the concept that how well you managed your credit in the past will indicate how well you can and will manage credit in the future.

Your BEACON® or EMPIRICA® score

The two most recognized credit reporting agencies in Canada are Equifax and Trans Union.  Equifax calculates a BEACON® score while Trans Union calls it an EMPIRICA® score.  Both agencies will use the information found in your credit report and generate a credit score between 300 and 900.   Most traditional mortgage products require a minimum credit score of 680 varying slightly from one financial institution to another.

Here is an example of why lenders take your credit score so seriously.  Canadians statistics indicate that 78% of borrowers with a credit score below 499 will default on a loan, file for bankruptcy or be 90 days past due  on at least one credit account in the next two years.  In comparison, the same can only be said of  5% of borrowers with a credit score between 700 and 749.

The increased risk associated with lending money to borrowers with lower credit scores is passed on to consumers in the form of paying higher interest rates for their mortgages and other loans, or worse being turned down for credit all together.

How is your credit score determined?

Payment history (35% of the overall score)

• Account payment information on specific types of accounts (credit cards, retail accounts, installment loans, finance company accounts, mortgage, etc.).
• Presence of adverse public records (bankruptcy, judgments, suits, liens, wage attachments, etc.), collection items, and/or delinquency (past due items).
• Severity of delinquency (how long past due).
• Amount past due on delinquent accounts or collection items.
• Time since (recency of) past due items (delinquency), adverse public records (if any), or collection items (if any).
• Number of past due items on file.
• Number of accounts paid as agreed.

Amounts owed (30% of the overall score)

• Amount owing on accounts.
• Amount owing on specific types of accounts.
• Lack of a specific type of balance, in some cases.
• Number of accounts with balances.
• Proportion of credit lines used (proportion of balances to total credit limits on certain types of revolving accounts).
• Proportion of installment loan amounts still owing (proportion of balance to original loan amount on certain types of installment loans).

Length of credit history (15% of the overall score)

• Time since accounts opened.
• Time since accounts opened, by specific type of account.
• Time since account activity.

New credit (10% of the overall score)

• Number of recently opened accounts, and proportion of accounts that are recently opened, by type of account.
• Number of recent credit inquiries.
• Time since recent account opening(s), by type of account.
• Time since credit inquiry(s).
• Re-establishment of positive credit history following past payment problems.

Type of credit used (10% of the overall score)

• Number of (presence, prevalence, and recent information on) various types of accounts (credit cards, retail accounts, installment loans, mortgage, consumer finance accounts, etc.).
  
   

Credit scores for individuals are continually changing as credit files are being updated so fluctuations of a few points from month to month are common.  Having said that, there are no quick fixes for borrower's to improve your credit score.  The best way to manage your credit score is to manage your credit responsibly over an extended period of time by paying your bills on time, keeping low outstanding balances on your credit cards, and removing incorrect negative information from your credit files.

I hope you find this credit information helpful.  If you or someone you know would like more information on credit scores or any other mortgage or housing industry topic please call 416.303.4480 or visit my website at  http://www.thescooponmortgages.com/

Sincerely,

Domenic Mirabelli
Morcan Financial Inc.
(416) 303-4480
domenic.mirabelli@migroup.ca
http://www.thescooponmortgages.com/

"Helping you find a mortgage and peace of mind"