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Understanding your credit score! |
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Sep 28, 2010 at 11:33 PM |
It is very important to understand how your credit score is calculated and what factors attribute towards a credit rating. After all your credit score is a judgment about your financial health, at a specific point in time. Additionally it indicates the risk you represent for lenders, compared with other consumers.
Your credit file is created when you first borrow money or apply for credit. On a regular basis, companies that lend money or issue credit cards to you — including banks, finance companies, credit unions, retailers — send specific factual information related to the financial transactions they have with you to credit reporting agencies.
When you apply for a new loan, the lender will check your credit history first. Your credit score in most cases influences the amount you can borrow and also your interest rate. Understanding your credit score in a better way enhances your chances to develop a higher score and thus benefit from loans at better terms and conditions.
Ranges of Credit Scores:The chart above shows the %age of people who score in specific FICO/BEACON score ranges. For example, about 4% of Canadian consumers have a FICO/BEACON score between 550 and 599. Your score of 760 places you in the 750-799 range, along with 27% of the total population.
(Note that the score ranges shown above are provided for your information, but they do not necessarily correspond to any particular lender's policies for extending credit)
· Most lenders like to see credit scores in the range of 700 and higher!
· For CMHC insured mortgages min credit score requirement is 640 or higher!
A credit score is calculated from many different factors:
1. Payment History
a. Most important factor and any late payments will show up as R1, R2 etc
2. Credit Inquiries
a. Too many inquiries can also reduce your score
3. Debt Ratio
a. Rule is always stay within 70% of your credit limit
4. Length of Credit
a. For CMHC deals clients need to have at least 2 years of credit history
5. Types of Credit
a. Mortgages are now being reported on the credit bureau
The following codes are mentioned next to each credit account on your credit report:
R0: Too new to rate, approved but not used
R1: Pays within the 30 day payment due date – on time.
R2: Pays in more than 30 days but < 60 days or not more than 2 pmts behind
R3: Pays in more than 60 days but < 90 days or not more than 3 pmts behind
R4: Pays in more than 90 Days but < 120 days or not more than 4 pmts behind
R5 Account is at least 120 days past due but not R9 yet
R7 Making regular pmts through special arrangement to settle debts
R8 Repossession of merchandise (voluntary or involuntary)
R9 Bad Debt, placed for collection, moved without giving a new address
“I” This is for Installment Credit
“O” This is for Open Credit
Your credit score is an indication of your financial health. You should do your best to avoid damaging your credit history with late or missing payments, too many outstanding loans or too many loan requests.
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