What is a Credit Score & How is a Credit Score Calculated in Canada? I am going to explain
it to you, right after this…. Hello and welcome back to my channel! My name
is Patrick Fields, Edmonton Real Estate Guy, I am licensed with RE/MAX Select
We always hear numbers thrown around when talking about credit score, oh this person
has a 500 credit score or this person has a 750 credit score, but what does that even
mean?? What is a Credit Score And how is it calculated??
Ok, First off, what is a credit score and why is it helpful? A credit score is a number,
based on specific information on a credit report. A credit score is used by lenders
to predict the likelihood that you will repay future debt. Your credit score changes frequently
and each lender decides how they interpret and use your credit score and if they will
lend you any money! Ok, What Does a Credit Score Mean?
A credit score is a number which can range from a low near 300 to a high of 850 or 900,
this will depend on which company is calculating the score.
If someone’s score is 580, it means that “580 people out of 850 are likely to repay
their debt.” If someone’s score is 780, it means that “780 people out of 850 are
likely to repay their debt.” The number represents the odds that a lender
will get the money back that they lend someone. The higher the number, the better the odds.
Ok, so we know credit score can go up to 850 or 900, what are the 5 Key Factors in Calculating
and Determining Your Credit Score?? A number of specific factors go into determining
a credit score. These factors are based on what someone does or doesn’t do with the
credit they already have available. That is why the score changes frequently. Here are
the 5 factors that determine your credit score: Representing 35% of your credit score and
the biggest factor is Payment History!! Your payment history is the most important
factor in your credit score. Obviously, before someone lends you money, they want to know
if you are going to pay them back!! Your payment history reflects all the payments
you make to all of your consumer debts. Creditors report every time you make a payment to your
credit cards, line of credit, car loan, personal loan, student loan, cell phone and any other
regular debts you have. Interestingly enough, mortgage payments are not reflected on a credit
report, but ALMOST everything else is. The payment information that is reported shows
separately for each account you have. It shows whether or not you’ve paid as agreed, it
shows if it is a deferred payment plan or if payments aren’t currently required (like
for a student loan), how many past due payments you have, how often your payments have been
late, if you have any debts in collections and if you have any negative information in
the public records portion of your credit report – LIKE bankruptcy, judgments, liens,
etc. Your score also reflects how recent any late
payments or collection activities are. The older the information gets, the less it will
impact your score. This is where time and good behavior are on your side!
The next factor to get to 100% of a credit score is How Much is Owed, and this represents
30% When you apply for credit, how much you already
owe really matters to a lender. Your current payments will determine if you can manage
any more payments in your budget for the additional money you borrow. Makes sense right, if you
owe more than you make – why would anyone lend you money??
While you might think that you can handle more credit, statistically speaking, there’s
a chance you might not be able to. If you are close to maxing out all of your credit
cards or your line of credit, it means that you are a higher risk to lenders. Higher risk
to a lender means that there’s a greater chance that you won’t keep up with your
payments and not pay them back. Another aspect of this part of your credit
score reflects how much of your available credit limits you use on an ongoing basis.
If you usually use 60% or more of your credit limit on a credit card or line of credit,
it will impact your credit score negatively. This is because if something were to happen
to your income and you owe a lot of money, you would find it VERY DIFFICULT to make the
payments. The 3rd factor is your Length of Credit History,
and this makes up 15% of the total. If you have had credit available to you for
a long time, your credit report should provide an accurate picture of how you use credit
and if you ever had to get through a difficult time. For someone who has not had or used
credit for very long time, it is difficult to tell if they really know how to use credit
responsibly. Your score will reflect how long it has been
since you first obtained credit, how long each item on your credit report has been reporting
and whether or not you are actively using credit right now.
If you have recently obtained credit for the first time, your credit score will not be
very strong. However, if you have been using credit responsibly for many years, this factor
can work in your favour. If you have been involved in a bankruptcy,
consumer proposal, orderly payment of debt or debt management program, your credit history
will essentially restart whenever you complete your program.
Most information will be automatically removed from someone’s credit report after 6 – 7
years, this isn’t an overnight fixable situation, so the only way to keep a credit report active,
is to use credit, even minimally, on an ongoing basis.
Nearing the end, New Credit Applications makes up just 10% of your overall score!
Frequently applying for new credit can signal financial difficulty. In the industry it’s
called “credit shopping” and it does NOT reflect favourably on someone’s credit score.
It is not unreasonable for a creditor to worry about how often someone applies for new/more
credit because the more “new” credit someone gets, the harder it can become for them to
keep up with all of their payments. This part of your credit score takes into
account the number of times your credit has been checked in the last 5 years, the number
of credit accounts you have recently opened, how much time has passed since you opened
any new accounts and the time since your most recent credit inquiries. This part of your
credit score will also evaluate whether or not you are re-establishing your credit history
following past payment problems. And representing the last 10% is the Types
of Credit Used! Even though this part of your credit score
makes up 10% of the total, it is the least significant part, unless you don’t have
much other information on your credit report. Different types of credit shed light on how
you handle your money overall. For example, deferred interest or payment plans can indicate
that you aren’t able to save up for purchases ahead of time. Consolidation loans mean that
you’ve had difficulty paying your debts in the past. A line of credit is a revolving
form of credit, like a credit card, and it’s easier to get into trouble with a revolving
form of credit than with an installment loan where you make payments for a set amount of
years and then it’s paid in full. If you focus on managing your finances wisely
and ONLY apply for credit as you need it, this part of your score should take care of
itself. The factors outlined above are calculated
slightly differently by the two credit bureau companies in Canada, Equifax and TransUnion,
and it is up to each lender to decide how they interpret and use credit scores and credit
report information. As such, the factors above are not the only
things that are important when you apply for credit. Lenders will also consider factors
such as your income, your assets, how long you have been at your job and the reason why
you are applying for credit. Is Knowing Your Own Credit Score Important?
Some people really want to know what their credit score is, they might even brag about
it... However, it changes often, so be prepared. Also, keep in mind that your credit score
is intended to reflect the likelihood that you will repay any money that you borrow.
Focus on managing your money carefully with a budget and only apply for credit that you
need, and your credit score will take care of itself.
I made another video that talks about how to fix your credit score and how to get a
copy of your credit report, I will post a link to it up here.
If you have any questions, just give me a call, send me a text or an email or reach
out to me on What’sApp! Thank-you for watching! Stay safe, stay well
and I will see you next time!