What affects the credit rating?
What is the credit score?
The credit score (sometimes called “credit report”) is the score that represents your financial picture. It is a capture of your financial behavior and payment history.
Credit scores tell different lenders how well you’ve paid off your debts in the past, and met their due dates. Thus, the credit score demonstrates your ability to pay your debts on time.
This rating varies from 300 to 900 points. A rating of 300 is considered a bad score and 900 is the best possible score.
In Canada, two companies collect your data to calculate your score: Equifax and TransUnion. They do this based on your financial history, your debts, your repayments, your use of credit cards and many other factors.
5 important factors for borrowing money!
Financial institutions take into account 5 key things before granting you a loan, a line of credit or a credit card:
- Your debt ratio
- Your credit rating
- Your monthly income
- Your assets
- Your job stability
How is your credit score calculated?
Payment history
Your payment history counts for approximately 35% of your credit score.
In other words, it is very important to pay your bills on time and in full. Do the same with any other debt: your credit cards, lines of credit, and loans.
Any late payment exceeding 30 days is noted on your credit report for several years, whether it is a small amount or a large amount. Also, the longer the delay, the more it will have a negative impact on your credit rating.
Use of credit
About 30% of your score is influenced by your use of credit tools.
If more than 50% of your cards or lines of credit are used, your rating could be negatively affected.
Our tip:
Get a credit limit equal to double the expenses you plan to make. As an example, if you plan to spend around $500 each month with your card, you should have a credit limit of at least $1000.
The length of credit history
Did you know that the age of your credit history influences 15% of your credit rating?
Lenders will tend to trust your repayment habits more if they are based on a longer period.
So, assuming you’ve maintained good habits, the older your history, the better your credit score will be.
Our tips:
- Try to keep your banking service providers as long as possible.
- Also, don’t open new accounts unnecessarily.
- Keep only one credit card: the oldest!
New credit applications
Your new credit applications count for 10% of your score.
Each time you apply for credit, it is noted in your file.
Financial institutions consider that if you apply for too much credit, you want to borrow too much (or at least too often), and that you may be at risk of going into debt. This can therefore negatively influence your credit rating.
Our tip:
Make several requests at the same time, with several institutions. If they are done in less than 2 weeks, it will count as a single consultation of your file.
Keep an eye on your number of creditors
It also counts for 10% of your rating.
Credit score is favored by variety of accounts, but not when it comes to the same kind (e.g. 7 different credit cards from different creditors)
Our tips:
- It’s good to have different accounts (personal loan, car loan, line of credit, mortgage), but not the same type because your chances of over-indebtedness will be higher.
- Pay attention! Having several different accounts increases the risk of forgetting to make payments on time.
Conclusion
Loans refused? Interest rates too high?
It could turn out that your credit rating is not as good as you think!
To remedy this situation, you need to know the elements that influence your score.
If you want to achieve your wildest projects (auto, home, renovations, trips, or others), take action and take good habits to rebuild your credit rating.
Source : https://www.raymondchabot.com/fr/articles-et-conseils/le-credit/les-5-elements-qui-affectent-votre-cote-de-credit/