What is a Credit Score? How Can I Calculate My Credit Score?
Typically, a 3-digit credit score ranges from 300 to 900. According to TransUnion, the average credit score is 650, but it varies from province to province. When you’ve reached a credit score of 650, you will be able to qualify for more financial advantages.
A credit score shows a person’s creditworthiness based on the length of credit history, payment history, and the amount of debt you borrow. You can use your credit score to build your financial confidence. Additionally, you may be able to obtain more competitive interest rates.
In Canada, Equifax and TransUnion are the main two private credit bureaus. These companies keep tracking your credit history. They assess your information to determine your credit score. Let’s learn more about it!!!
What Is A Credit Score?
A credit score is a three-digit number calculated from the information in a credit report. Banks, credit card companies and car dealerships surrey use your credit score as part of their decision-making process while considering whether to approve your credit application or not.
When you manage your credit responsibly, you’ll earn some points. These points are added to your credit report to build a credit score. A credit score range varies with the credit scoring model, but it is similar to this:
- 300-692: Poor
- 693-742: Fair
- 743-789: Good
- 790-832: Very good
- 833-900: Excellent
Depending on their industry, creditor and lenders may use different scoring models to determine the excellence in your credit scoring that may include income, down payment etc. For example, your payment history becomes more important for auto lenders when you are purchasing a car in Surrey BC.
Credit Report: What is It?
A credit report is an informative report that summarizes your payment history. It contains all the transaction information that you’ve done. A credit report helps you determine how well you use your credit and how hard it would be for you to obtain a loan or mortgage in Canada.
If you buy a vehicle on loan, the lender uses your credit report to verify your information, analyze your borrowing history and review your repayment record.
Who Can Use Your Credit Report And Why Does It Matter?
A credit report is subject to strict rules that determine who can access and use it. Here is the list of agencies or people who may have access to your credit report:
- Auto leasing companies (Approved Auto Loans)
- A bank, credit union, or other financial institution
- Insurance and mortgage broker companies
These companies or people use your credit report to determine whether your credit is good enough for a loan.
Having no credit history or poor credit history can reduce your chances of getting a loan or a mortgage. Before buying the vehicle.it would be recommended to maintain a good credit score for an easy and hassle free process. Your good credit score can be the reason to get a vehicle loan on low interest rates.
How To Calculate A Credit Score?
In Canada, financial companies (Equifax, and CreditKarma) offer you to check your credit scores. According to FICO (credit score vendors used by most financial institutions), the following five factors determine a credit score.
- History of Loan Repayments (35%)
A credit score is based on 35% of this factor, making it the most significant factor. In this criterion, credit bureaus examine how quickly you are repaying your phone bills, car loans, debts etc.
- A total sum of money owed by you (30%)
Your 30% credit score is determined by this factor, which is the second most important. In this factor, credit bureaus look at how much you owe overall, and how easy it is for you to pay off debts.. Basically, it measures your current debt-to-credit ratio.
Higher the credit utilization ratio reflects a more negative impact on your score. You have to maintain a credit card balance to less than 40% of your card limit. Once your credit card balance crosses the limit of 40%, it begins to get impacted negatively.
- Brief credit history (15%)
A lendercan assess your creditworthiness if you repay your credit installments timely. You will have a better credit score if you use credit responsibly for a long time.
For bigger loans, it can be difficult to determine the credit score without any past credit record. People who are new to credit may have lower credit scores and are eligible for only small loans.
- New Credit Applications (10%)
The lender makes a “hard inquiry” on your credit report when you apply for a new line of credit. It is essential to keep track of the no. of credit accounts you have recently opened and the frequency of your credit inquiries.
You can request your credit report by making a “soft inquiry”. Soft inquiries do not affect your credit score directly.
- Mixed Credit (10%)
The credit score is influenced by 10% by this factor. Your credit score will impact positively if you have a mix of credit, such as credit cards, car loans, mortgages.
Tips To Increase Your Credit Score
Taking the first step to learning how credit scores work and how you can improve your own, is a great way to improve your financial confidence and security. The Canadian government has provided some tips to improve your credit score.
- Build credit history by using a credit card to purchase items online or in-store responsibly. With the help of a credit bureau, you can view your credit history. The credit bureaus will give you a free copy of your credit history. You can request a report over the phone or by email.
- To improve your credit score, always make your payment on time. In case you are unable to pay your bill on time, at least pay the minimum amount. If you are having a problem paying your bills, contact your lender.
- Try to keep your total debt under control and limit your use of credit cards as much as possible. Don’t let small balances rise to high levels.
After you’ve followed all these steps, you will quickly achieve a good credit score. You can even do it if you’ve been through bankruptcy.