Understanding Your Credit Score

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Anyone who has ever borrowed money (e.g., for a car, house, credit card, line of credit) has a credit history. Your Credit Score is a judgment of your financial health and credit reliability at a specific point in time indicating the risk you represent to a credit lender.

Note that this means that if you have never borrowed money in your own name (perhaps the mortgage was in your spouse’s name first, and you used a “companion” credit card linked to your spouse’s account, and your spouse always paid the bills), then you may have no credit history. This is probably a bad thing, as it means you may have a hard time getting credit in your own name.

In Canada, credit history is recorded and scored by two major credit reporting agencies: Equifax Canada and TransUnion Canada.

These agencies have all your credit information for at least the last six years, including for example: how much you owe, your payment regularity, credit limit on each account, and how many authorized credit granters (e.g., bank, credit card company, phone company, rental agency, retailers) have accessed your file.

Each account is annotated with a letter identifying its type:

I: instalment account: credit on an instalment basis, which you repay in fixed amounts on a regular basis for a specific period of time until the loan is paid off (e.g., car loan, mortgage).
O: open credit: borrow money as needed up to a certain limit and the balance is due at the end of a certain period (e.g., student loan, line of credit).
R: revolving debt: make regular payments depending on your account balance which has a credit limit (e.g., credit card).

Each account is also assigned a number from 0 to 9, with subtle differences in meaning depending on the letter, for example, for revolving debt (R):

R0: Too new to rate; approved but not used.
R1: Pays (or paid) within 30 days of payment due date or not over one payment past due.
R2: Pays (or paid) in more than 30 days from payment due date, but not more than 60 days, or not more than two payments past due.
R3: Pays (or paid) in more than 60 days from payment due date, but not more than 90 days, or not more than three payments past due.
R4: Pays (or paid) in more than 90 days from payment due date, but not more than 120 days, or four payments past due.
R5: Account is at least 120 days overdue, but is not yet rated “9.”
R6: This rating does not exist.
R7: Making regular payments through a special arrangement to settle your debts.
R8: Repossession (voluntary or involuntary return of merchandise).
R9: Bad debt; placed for collection; moved without giving a new address; bankruptcy.

For a revolving account (e.g., a credit card) an R1 rating is the best notation – it means you generally pay your bill on time.

What you want to see is many R1 ratings on your credit history.

There are many different ways to work out credit scores. The credit-reporting agencies Equifax and TransUnion use a scale from 300 to 900. Higher scores are better. Your credit score is calculated from the information in your credit report.

Equifax Credit Score

Poor: 300-559
Fair: 560-659
Good: 660-724
Very Good: 725-759
Excellent: 760+

TransUnion Credit Score

Very Poor: 300-559
Poor: 560-699
Fair: 700-749
Good: 750-800
Very Good: 801-900

High scores on this scale are good. The higher your score, the better you have been at paying your bills, and the lower the risk for the lender. Every lender has different requirements for what they consider an acceptable/unacceptable level of risk. They can also use your score to set the interest rate you will pay.

What Affects a Credit Score?

– 35% payment history (punctuality of payment)
– 30% amount owed (less is better but owing a little and paying back responsibly is better than having no credit history)
– 15% length of card history
– 10% card mix
– 10% new cards

The Government of Canada publication Understanding Your Credit Report and Credit Score details the process and provides information on how to build/improve credit history, and to check for identity theft.

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