When you want to check your credit score before applying for a car loan, a mortgage, or an apartment, you contact Equifax or TransUnion and they send you a free report by mail or, for a fee, an instant report online. There you find a number between 300 and 900, a number that tells potential lenders how big of a credit risk you are. That number will determine whether or not you get approved for the loan. or it may affect the interest rate you’re offered.
The lower your credit score, the higher the interest you can expect to pay, as you’re seen as a higher risk borrower. A credit score of 500 is considered “Poor,” a score of 700 is “Good,” and around 800 and higher is considered “Very Good.”
But what goes into calculating this number that can define your financial future? There are 5 primary factors and at David Sklar & Associates, we wanted to walk you through them, as well as how much weight they have on your score.
#1 Payment History (35%)
The most important factor in your credit score is your payment history. Every time you’re late to pay a utility bill, make a mortgage payment, paying your rent, or you miss a minimum payment, your credit score takes into account whether you were over 30, 60, or 90 days late. It also shows if you’ve had any debts go into collections or if you’ve ever faced foreclosure or bankruptcy.
#2 Debt Amounts (30%)
This is how much money you currently owe, whether it’s a phone bill you haven’t paid yet, your credit card balance, or the balance on your mortgage. It shows potential lenders how much of your credit limit you’ve already used as well as what proportion of a debt you’ve already paid back. Having zero debt is not necessarily as good as having some debt that’s paid back regularly, as it shows a pattern of behavior.
#3 Length of Credit History (15%)
This is how long you’ve been using credit and it plays an important role, too. An 18-year-old who just paid off their first credit card balance isn’t going to have the same kind of credit score as someone in their 40s who’s never missed a mortgage payment or a hydro bill.
#4 New Credit (10%)
Opening a new credit account may be necessary, but it’s generally a good idea not to open a new credit card before you apply for a major bank loan. New credit accounts will count against your credit score; use them and pay them down to improve your rating.
#5 Types of Credit (10%)
Your credit score improves when you use multiple types of credit, i.e., not just credit cards, but lines of credit, mortgages, car loans, etc. A Licensed Insolvency Trustee at David Sklar & Associates can teach you what kind of credit mix can help your score.
Insolvency will have a major impact on your credit score as well, and the impact is one of the differences between bankruptcy versus Consumer Proposal, a process which involves agreeing to pay a smaller amount of debt to your creditors because you’re insolvent. A Consumer Proposal will be on your credit history for three afters after you finish paying it off, whereas a bankruptcy takes six to seven years to clear. If you can’t decide which one is best for you, David Sklar & Associates are here for you, to advise you on the path forward. The decisions you make now will affect your credit score for years to come.
If you’ve got a poor credit score and you’re struggling to pay down debt, learn what a bankruptcy trustee can do to get you out of the hole and back on track. You can eliminate your debts and rebuild your credit score with a bit of help, patience, and a financial plan.