We often hear the term “Credit Score” but what does this really mean…

Our Credit Score defines your creditworthiness by associating a value to you which could be an R.. or something along the lines of 720 or higher, or simply put it helps define or evaluate risk when lending money to you.

So to start; what is the difference if I have an R or a number….

Some credit-reporting agencies report the lenders’ rating of each of your credit history items on a scale of 1 to 9. A rating of “1” means you pay your bills within 30 days of the due date. A rating of “9” means that you never pay your bills at all or that you have made a consumer debt repayment proposal to the lender. A letter will also appear in front of the number: for example, I2, O2, R2. The letter stands for the type of the credit you are using.

A credit score is a numerical expression based on a level analysis of a person’s credit files, to represent the creditworthiness of that person. A credit score is primarily based on credit report information typically sourced from credit bureaus.

  • “I” means you were given credit on an installment basis, such as for a car loan, where you borrow money once and repay it in fixed amounts, on a regular basis, for a specific period of time until the loan is paid off.
  • “O” means you have open credit such as a line of credit, where you borrow money, as needed, up to a certain limit and the total balance is due at the end of each period. This category may also include student loans, for which the money may not be owing until you are out of school.
  • “R” means you have “revolving” credit, where you make regular payments in varying amounts depending on the balance of your account, and can then borrow more money up to your credit limit. Credit cards are a good example of “revolving” credit.

What do the numbers mean:

  • Good 800+ Excellent
  • 750-800 Very Good
  • 700-750 Good
  • 650-750 Fair
  • 600-650 Poor
  • Below 600 Very Bad

The five main components of your score:

  • Payment History: 35% – about 298 available points.
  • Outstanding Debt: 30% – about 255 available points.
  • Length of Credit History: 15% – about 127 available points.
  • Diversity of Credit Accounts: 10% – about 85 available points.
  • Number of New Credit Applications: 10% – about 85 available points.

Lenders, such as banks and credit card companies, use credit scores to evaluate the potential risk posed by lending money to consumers and to mitigate losses due to bad debt. Lenders use credit scores to determine who qualifies for a loan, at what interest rate, and what credit limits. Lenders also use credit scores to determine which customers are likely to bring in the most revenue. The use of credit or identity scoring prior to authorizing access or granting credit is an implementation of a trusted system.

Keep in mind once you Improve your Credit Score it helps you in many ways it is not just limited to the banks. Other organizations, such as mobile phone companies, insurance companies, landlords, and government departments employ the same techniques. Credit scoring also has much overlap with data mining, which uses many similar techniques. These techniques combine thousands of factors but are similar or identical.

What can you do to improve your credit score

Acquire a secure credit card
A secure credit card is also known as a pre paid credit card. This type of card enables you to put money on the card before you use it instead of other types of credit cards which extend the money to you. There is no reoccurring debt because you have already paid the account before you spend the money. By making regular payments and spending a small amount of credit each month, you are establishing that you can make payments regularly.

This will go a long way toward improving your credit score.
Set-up a monthly bill to be paid, choose a company that reports to the credit bureau. To determine which companies report to the bureau, simply look at your report.

Obtain a regular credit card
If you are able to obtain a low balance card, place two monthly payments onto the card with a vendor that reports to the bureau. Set automatic payments to occur on your card every month on a specific date before your due date.
This will establish that you are using the card and establishing a preferred payment history. By paying prior to the due date it will spare you from having to pay interest on carry over balances.

Internet banking
Internet banking enables you to get a quick glance of your finances and setup automatic payments. Auto payments offer great benefit for those who miss payments or continuously late on payments.

No new accounts
Try to avoid opening new accounts. Any new account(s) or attaining more credit can affect you in a negative way; a hit to your credit report; and ratio of credit to available credit.

Protect the Bureau
Do not give your authorization to have a credit report pulled for any reason. Guard your social insurance number.

Work with your credit
Simply stop using credit altogether is not the best way to help improve your credit score. It must be proved to the credit bureau that you can make regular payments on time and at the very least a minimum payment. Using credit is the best option to improve your credit score.

Pay down revolving accounts
Accounts where the amount can vary (such as credit cards) are known as revolving. Paying down these accounts to less the 50% shows persistence; helping the score section which looks at the applicants ration of used credit to available credit. This section is worth approximately 30% of your entire score.

Automate Bill payments
Prevent future late payments (this can affect 35% of your credit score). Automate your payments for fixed accounts and set future payments for accounts that vary as soon as your bill arrives.

Report errors
Sometimes creditors are slow to report accounts paid or a report can have errors. If this occurs contact the credit companies to have the errors corrected or fixed immediately. Keep all receipts and watch you accounts.

Negotiate lower payments
When companies write off accounts, collection agencies purchase it from the company and attempt to get the money. They are looking to recoup as quickly as possible, therefore they are usually willing to negotiate the final amount owed.
You can pay off debts in collection faster when you negotiate the price as low as possible.

Your credit report
If you discover something on your credit report that you feel is incorrect. Contact the bureau and discuss the matter. It is important to review your credit and understand how the bureau views your portfolio and credit history.

Monitor your Credit report;
You may not realize that you are able to check your credit without any impact on your score;

• Equifax – www.consumer.equifax.ca
• TransUnion – www.transunion.ca
• Experian – www.experian.com