And what the FICO is up with your score?
‘What’s the BIG DEAL about credit scores?’ you might ask.
If you have to ask, yours might be a BIGGER DEAL than you “aren’t” imaging!
If you’re self-employed, it’s CRUCIAL to keep your credit score above 650 if you plan on growing your business, getting a credit card, line of credit, mortgage, or financing. Most banks require a minimum score of 650 with no collections on file to even consider an application.
In most cases, the higher your credit score, the lower the interest rate.
Whether it’s a bank, credit union, credit card company, or car dealership, they’ll look at your credit report to learn how you’ve managed your finances in the past, which helps them determine the level of risk involved in lending you money. Oftentimes, the higher their risk, the higher your interest rate.
But what does your credit score have to do with your history? And how do they come up with the number?
Credit scores typically range from 300 to 850 – the higher the better. Your credit score isn’t just an arbitrary number. It’s calculated using an algorithm—a mathematical credit score formula created to consider multiple aspects of your history including:
- Late or missed payments (when you miss a payment on your credit card, car, mortgage, LOC or utility bill, it shows on your credit report and reduces your score. We’ll give some important details below.)
- Credit utilization ratio (the difference between your available credit and how much you’ve used. We’ll tell you what the banks look for.)
- Length of credit (how many years you’ve had credit for.)
- Types of credit you have (credit cards, mortgages, vehicles. Having a variety of credit types can sometimes increase your score.)
- New Inquiries (Who’s pulling your credit report?) Every time someone other than you checks your credit, your score will decrease a bit. We’ll go into more detail about what to watch out for and what banks care about.
- Collections / Legal Activity / Bankruptcy / Consumer Proposal (these things stay on your credit report for several years and will drag down your credit to lower than low scores.) Even though these are wiped from your credit report after several years, many 1st tier lenders won’t lend you anything if you’ve ever had a bankruptcy or consumer proposal.
To make matters more complicated, the majority of Canadian lenders, including major banks, use what’s known as the FICO Score (instead of credit scores) to make decisions about credit approvals, terms, and interest rates.
The credit score you see on Equifax or TransUnion is very different from your FICO Score—sometimes by as much as 100 points!
The FICO Score model is based on credit scores from Equifax, Experian, and TransUnion, however, it’s generally an average of your credit score over time, whereas your credit score is a snapshot of what your score is today. For example, if your current Equifax score is 700, but over the past several years, it’s averaged 600, your FICO Score will be closer to 600.
The bummer part is, it’s impossible for you to know what your FICO score is because only lending institutions have access to it. All you can check is your credit score and hope that it gets somewhere close to your FICO.
- Get your free Equifax credit report here.
- Or pay for your TransUnion credit report here.
Your credit score doesn’t increase when YOU pull your own credit.
The huge credit-scoring organizations use FIVE main factors to calculate credit scores in weighted percentages.
The most common credit scoring factors on your credit report are:
35% – Your payment history: Your credit score will reflect the on-time payments you make, as well as late or missed payments.
- Each time you’re over 30 days late making a payment on your credit card, phone, automobile, or loan, it will lower your credit score. Not all companies report late payments to the credit bureau, but most of the big ones do.
- Paying something 30 days late won’t drag down your score as much as paying something 90 days late. Some banks won’t lend anything to someone who has a few 90 days late payments.
- Payment history is the most highly weighted factor used to calculate your credit score.
30% – Credit utilization ratio (capacity): The difference between your available ‘revolving credit’ and how much you’ve used.
- For example, if you have a credit limit of $10k, and the balance owing is $3k, your utilization rate is 30%…which is the maximum utilization that banks like to see.
- The higher the utilization rate, the higher your credit score.
- Having a utilization rate of 10% to 30% is recommended—especially if you’re applying for a loan.
15% – Length Of Credit: Lenders want to see an established history with on-time payments and how old your credit accounts are is important.
- If your first credit card, car, or cell phone was issued last year, you’ll only have 1 year of credit history which won’t be long enough to be eligible for business funding from a bank.
- Generally speaking, the longer your credit history, the better.
- If you have more than 1 credit card, they will average the age of all your accounts.
10% – Types Of Credit—AKA ‘Credit Blend.’ Having various types of credit available to you is a point in the ‘pro’ column.
- People with top credit scores often carry a diverse portfolio of credit accounts, which might include a car loan, credit card, student loan, mortgage or other credit products. It’s an indication of how well you manage a wide range of credit products.
10% – New Inquiries:
- Checking your own credit is considered a ‘Soft Inquiry’ and isn’t counted against your credit score.
- Each time a lender runs your credit report for a lending decision, a ‘Hard Inquiry’ is recorded in your file. These inquiries stay in your file for two years and can cause your score to go down slightly for a period of time.
- Lenders look at the number of hard inquiries to gauge how much new credit you are requesting. Too many inquiries in a short period of time can signal that you are in a dire financial situation or you are being denied new credit.
- If a bank pulls your credit, your score will decrease less than if a 3rd tier (high risk) lender does—like MoneyMart. Some lenders won’t lend you anything if they see that high risk lenders have recently run your credit. Makes you look too high risk.
- The number of ‘Hard Inquiries,’ the ‘tier’ of the lender inquiring, as well as the number of credit accounts you’ve recently opened make up 10% of your score.
Defaulting On Accounts
These things will drag down your credit to lower than low scores and will make it difficult for you to get approved for anything from the bank. The types of negative account information that can show up on your credit report include:
- Foreclosure, bankruptcy, repossession, charge-offs, and settled accounts.
- Public records can also include tax liens, or civil judgments (ie family support).
- These can severely hurt your credit for up to a decade. Some things remain on your credit for 7 years, but many loan applications will ask if you’ve “EVER” claimed bankruptcy or filed to settle accounts (consumer proposals).
Our team at PFG Financial recommends that you check your Equifax credit score once a month. Remember, it’s a “soft inquiry” and won’t go against your credit. This way, you can take action if you notice something out of place. Since clearing up discrepancies on your credit report can take months in some cases, you’ll want to deal with any issues as soon as possible.
As your financial profile changes, so does your score, so knowing what factors and types of accounts affect your credit score gives you the opportunity to improve it over time. Contact us if you need help.
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