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Have you ever looked up your credit score? If you haven’t, you should. It’s important to keep on top of the details of your credit report and make sure your credit score is accurate since it can help you secure a job, rent an apartment, borrow money, or purchase a house. Keeping an eye on your report can also help you protect yourself against identity fraud.
What is Your Credit Score?
Basically, there are two credit reporting agencies (CRAs) in Canada, Equifax and TransUnion. Every time you open a credit account, the account holder reports to one or both of these agencies. The CRAs collect information about the way you use credit and pay it back. They use the information they collect to assign you a score between 300-900.
- Terrible (less than 500)
- Very Poor (500-579)
- Poor (580-619)
- Fair (620-679)
- Good (680-719)
- Very Good (720-779)
- Excellent (780+)
If you have a credit score at the lower end, maybe you’ve never used credit or have filed for bankruptcy or a consumer proposal. It might be difficult for you to borrow money because lenders view you as high risk. With a credit score at the higher end, lenders tend to see people who always pay their bills on time and have had little to no financially irresponsible behaviour reported on their credit report. These consumers typically have a much greater chance of being approved. So, the higher your credit score, the more likely it is that you will be approved if you are attempting to borrow money. People with high scores may also be offered higher limits and better interest rates.
Surprisingly, it’s not just lenders that are looking at your credit report. If you are a job seeker, potential employers may check out your file to see if you are responsible with your money. Potential landlords may use it to predict whether you’ll pay your rent on time, or not. Insurance companies may also take a look at your credit report before they finalize your policy.
It’s easy to check your credit file. Equifax and TransUnion will send you free reports by mail, each year, if you request them. It’s wise to do this, to make sure your personal information and credit history are accurate.
Unfortunately, the free reports don’t tell you your credit score, but you can obtain it online from either CRA, for a small fee. Recently, more free alternatives have become available, as lenders and other financial service providers have started partnering up with the two Canadian credit reporting agencies. This means it easier than ever for you to see what your credit score is, which also means there really is no excuse to not go for it.
When potential lenders access your credit file, it can cost you points on your credit score, but don’t worry. When you check your score yourself, it won’t affect your score at all.
Factors That Can Affect Your Credit Score
When the consumer reporting agencies calculate your credit score, they are looking at 5 main factors and they are given the following weights:
Payment History (35%)
They will be looking at how often you pay your bills on time and the frequency of late or missed payments. If you have accounts that have gone to collections or have filed a consumer proposal or bankruptcy, your credit score will be reduced accordingly. How does your payment history affect your credit? Find out here.
Current Debts (30%)
The higher your debt level, the greater risk you represent to lenders. Keeping your debt under 35% of your total credit limit will help keep your score healthy.
Account History (15%)
The longer your accounts have been open, the better, especially if they are in good standing.
Number of Inquiries (10%)
The number of times you apply for new credit can affect your credit score. Those made within the previous year are considered. Several inquiries in a row can impact your score in a negative way.
Types of Accounts (10%)
The types of credit accounts are factored into your credit score. If you have a mix of credit types, it highlights your ability to manage various kinds of credit.
Check out this infographic for a complete break down of your credit score.
Why is the Length of Your Credit History Important?
When it comes to the length of your credit history, lenders will consider the account that has been opened longest as well as the average age of all your open accounts. Lenders will look at your credit history to predict your future behavior and decide whether to approve your application. Accounts, in good standing, that have been open longer, will reflect more positively in your credit score. Age isn’t everything though. If lenders see long-term accounts that are riddled with late or missed payments, your score will be impacted negatively.
According to Equifax, you should keep your oldest account open, in most cases. They also suggest that since opening multiple credit accounts lowers your average account age, you should open as few as possible. Stick with what you really need. If creditors can see you have a long track record of using credit wisely, they’ll be more likely to approve you.
If you’re young, you’ll probably have a lower score because you haven’t had the chance to prove yourself yet. The good news is, while creditors do take length of credit history into account, it is less important than some of the other factors affecting your credit score. If you watch your payment history and keep your balances low, your account history will improve as time passes.
However, is it better to have a bad credit history or no credit history at all? Read this to find out.
What Age Does My Credit History Need to Be?
It’s always best to have accounts, with a variety of ages, in your credit file, but it is important to have an account or two that are significantly older. If you have accounts with an average age of 5, you are in good shape. But of course, longer is typically better. So If the average age of your accounts is ten years, you definitely can consider yourself to have a long credit history.
Here’s something you may not have thought about. When you pay off a debt, such as a credit card, you might be tempted to close that account to clean up the clutter in your credit file. You might want to think twice, if it’s one of your oldest accounts, especially if you’ve used it responsibly. Closing older accounts will lower the average age and might reduce your credit score.
The Length of Your Credit History Can Affect Products Differently
The age of your credit accounts may be more important to some lenders than others. Here’s how the length of your history applies to different products:
- Mortgages – If you are hoping to purchase a home with little or no credit history, it could be tough, especially if you are approaching the Big 5 banks with your mortgage application. Banks tend to be more stringent than mortgage brokers and online lenders, but if you have at least a year of history, you may be able to pull it off.
- Personal Loans – Again, it will depend on the lender, and you might be able to find companies who won’t pull your credit history at all. In that case, you won’t have to worry about how old your accounts are.
- Line of Credit – With a line of credit, you might have a little more difficulty getting approved, especially if you are looking for a higher credit limit or a lower interest rate. If you have an average credit history between 3-5 years, you’ll have a better chance of negotiating the line of credit you want.
- Credit Card – A credit card is a great place to start when you’re trying to build a credit history. Most consumers can get approved for one without a credit history.
- Car Loan – Like credit cards, car loans don’t usually require lengthy credit history, so they are a good option if you are trying to rebuild credit. Your approval could depend on the type of financing you go with, but 12 months of credit history should be adequate.
How to Improve The Age of Your Credit History
According to TransUnion, positive information can stay in your file for up to 20 years, so potential lenders can see how well you have managed your credit. This is great when you have no current history, which can happen if you pay off your mortgage or cancel old credit cards. Negative information is usually purged around the six-year-mark and if your track record improves, older information becomes less important.
If you have no credit history, taking out a small personal loan or applying for a credit card can help you start building your credit score. If you have poor credit, jump-start its improvement by using credit wisely and responsibly. If you are having difficulty being approved for a traditional loan, there are even more options to help you get started.
- Open a Low-Cost Cellular Phone Account – Cell phone accounts do show up on Equifax and TransUnion reports. You don’t need to choose the biggest and the best. An inexpensive phone with a monthly plan you can manage is all you need. If you stay with the same company for a long time, it will affect the average age of your accounts.
- Apply for a Secured Credit Card – Secured cards offer you credit, up to a certain limit, when you provide a deposit to be used as collateral. Secured credit cards can help you improve the average age of your credit accounts when you use them and pay them according to the terms of your agreement.
Remember, if your credit score isn’t as high as you would like it to be, you can always make changes to improve it. The best way to improve your credit score is to use credit responsibly over time.
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