I’ve been spending the past week or so really taking a step back. After considering all the expenses we’ve had in recent months, I have decided that the first step for me to focus my efforts on is improving my credit score.
A few weeks ago I had to look at getting a new car and that made me realize that since my credit rating is only “good”, I’m not entitled to the best offers out there. Although it upsets me for my family’s short-term needs, at least I can start taking some action to improve the score over time. To do this, I started by doing some research – as I normally do – on what influences credit scores most and how to get on the track of improvement.
In Canada, there are 2 major companies that provide credit scores to lenders – one from Equifax and another from Transunion. These scores and credit histories show every credit card or loan an individual has ever taken out and the payments they made and the ones they may have missed. All the information from your credit histories are put together to create your credit scores. Transunion and Equifax have fairly similar but slightly different scoring systems. Most lenders will typically only get a credit score from one of the firms but it’s unclear which company is used more often.
Understanding what makes up these scores is important so we all can have the power to get the best interest rates on loans and credit cards. Knowing areas that can most influence your credit scores give you the power to take charge and change your scores.
From what I found out, it appears that there 5 main factors that influence credit scores. These are:
1) Payment history – this is said to make up 35% of your score. This acts as the number one factor as it shows your historical behaviour to credit – do you pay on time, are you ever missing any payments? Missed payments have the worst effect on your score. At the same time, on-time payments are the best way to increase your score when you need to raise your score. To me, this is very useful information since I want to up my score.
2) Amount of debt owed – this comes in as the second most important, making out about 30% of the score. This is the amount of debt you owe, to credit cards and loans – considered your credit to debt ratio. Credit to debt ratio is the amount you owe in relation to the amount of credit you have available. If you have a credit card with a credit limit of $5,000 and you have used $2,500 of your limit, then your credit to debt ratio is 50%. I found out that it’s best not to lower your credit limits as it can mean a higher credit to debt ratio. It’s advised that you try to keep your credit to debt ratio at about 36%, at the very most 50%.
3) Credit history – this makes up 15% of your score. This element is the length of time you have had your accounts – this aspect increases your score the longer you have had them open. Due to this, you should not close old accounts. Closing old accounts will lower your scores, by shortening your credit history. It is better to keep them open, even if you don’t use them.
4) New credit and inquiries – this makes up 10%. I think that this influenced my score as I went through a period of applying for a lot of credit all at once. Apparently, any time you apply for credit, it is counted as an inquiry and lowers your credit score, a little. It is best to not have your credit pulled by others, except only when you need to. The good thing is, if you are shopping for a car or a home you can have your credit pulled several times, within a 14-day period, and it will only count as one inquiry.
5) Type of Credit – the final 10% of your score is made from the number of accounts, credit cards, mortgages and loans you have on file. All of this affects your score so having a mix of types of credit is best overall.
I realize now that keeping track of what is on your credit history is the best way to take care of any issues that can affect a score. I’ve already got a copy of my credit history from each of the credit bureaus but also got my score in hand too. I’m going to make this an annual activity – like my budget – so I can keep on top of my score and see the improvement as it occurs. Wish me luck!
