Understanding Your Credit Score

Understanding your credit rating and score is essential when buying a new home.  What is a credit score and why is it important?  Simply put, your credit score it is a judgment about your financial health.  For lenders it indicates the financial risk that you represent compared to other consumers.  There are different ways for companies to calculate your credit score.  Equifax and TransUnion (two large credit reporting agencies in Canada) use a scale from 300 to 900, with 900 being the highest (best) score you can achieve.  For lenders, the closer your rating is to 900 the lower the risk.  Lenders may also have their own way at arriving at credit scores and they will also have a lowest score they will accept from you and still lend you money.

It is important to know and understand that lenders will not only use this score to decide whether to lend you money or not, but they most likely will also use your credit score to decide the interest rate that they charge you.

The factors that influence your credit score include;

• Your payment history.  For example do you carry over a balance on your credit card from month to month or have you ever missed a payment on any of your debts.
• Any collection or bankruptcy recorded against you.
• Your outstanding debts.  What is the limit on your credit card? Is your spending close to your credit limit?
• Your account history.
• The number of recent inquiries made about your credit report.
• The type of credit you are using.  Do you only have credit cards, or do you have a mix of credit cards and loans?

These factors do not all have the same weight in influencing your credit score.  Of these factors that most important are your payment history, whether you have ever declared bankruptcy, and the amount of your outstanding credit balances.

Additional factors may also be included in your credit report but do not influence your credit score.  This includes factors such as mortgage information and your own personal inquiries into your credit report.

So how long will these factors influence your credit score?  In general the length of time is dependent on where you live and the type of information.    Below you will find two charts, one from TransUnion and the other from Equifax, detailing how long (in years) specific factors will remain on your credit report.

TransUnion	BC	AB	SK	MB	ON	QC	NB	NS	PEI	NL	Terr.
	Year(s)
Credit transactions (trades) (from the first date of delinquency)	6	6	6	6	6	6	6	6	6	6	6
Judgments (from the reporting date)	6	6	6	6	7	7	7	6	10	7	6
Collections (from the first date of delinquency)	6	6	6	6	6	6	6	6	6	6	6
Secured loans (registered items) (from the date opened)	5	5	5	5	5	5	5	5	5	5	5
Bankruptcy (from the discharge)	6	6	6	6	7	7	7	6	7	7	6
Registered consumer proposal, Orderly payment of debts (from the date satisfied)	3	3	3	3	3	3	3	3	3	3	3
Credit counseling (from the date satisfied)	2	2	2	2	2	2	2	2	2	2	2

Equifax	BC	AB	SK	MB	ON	QC	NB	NS	PEI	NL	Terr.
	Year(s)
Credit transactions (trades) (from the date of last activity)	6	6	6	6	6	6	6	6	6	6	6
Judgments (from the date satisfied or deposit)	6	6	6	6	6	6	7	6	7 to 10	6	6
Collections (from the date of last activity)	6	6	6	6	6	6	6	6	6	6	6
Secured loans (registered items) (from the filing date)	6	6	6	6	6	6	6	6	6	6	6
Bankruptcy (from the discharge date)	6	6	6	6	6	6	6	6	6	6	6
Registered consumer proposal, Orderly payment of debts (from the date paid)	3	3	3	3	3	3	3	3	3	3	3
Credit counseling (from the date paid)	3	3	3	3	3	3	3	3	3	3	3

Source: Equifax and TransUnion

 

For more information on understanding your credit report and credit score visit the Financial Consumer Agency of Canada, they have some great resources and advice on how to manage credit.