How the Types of Credit Accounts You Have Affect Your Credit Score
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Most Canadians don’t think about their credit score until they need to. When it’s time to take out a mortgage or purchase a new car, this trivial little number becomes a lot more important.
If You’ve Been Using Credit, You Have a Credit Report
In Canada, there are two agencies responsible for collecting information about your credit history, Equifax and TransUnion. Each time you open a new credit account, the company reports the information to one or both Consumer Reporting Agencies (CRAs) and they continue to collect information about your accounts as you use them. This data, along with your personal information is compiled into your credit report.
What is a Credit Score?
After a short period of credit use, often between 6-12 months, the credit bureaus will calculate your credit score, a number between 300-900. The CRAs each use slightly different calculations, so your score may vary a bit, depending who is providing it. If you’re hoping to secure a mortgage, open a new credit card, or even start a new cell phone plan, lenders may use your report and your credit score to evaluate your creditworthiness.
Keeping your credit score as healthy as possible can help you obtain higher credit limits and the most competitive interest rates from lenders who see you as a reliable and low-risk client.
Check out this infographic for more information on how your credit score is calculated.
Factors That Can Affect Your Credit Score
When you know how your credit score is calculated, you can use credit responsibly, hone in on the areas that need work and build your score consistently over time. The credit bureaus use 5 main factors to calculate your credit score and give each factor a certain amount of weight.
- Payment History (35%) – Have you always paid your accounts on time? Do you have any missed or past due payments in your history? Have you ever filed for bankruptcy or filed a consumer proposal? These records will help lenders predict your future payment behaviour. If your behaviour poses a risk to future lenders, your credit score will definitely be lower. If you always pay on time, your score will be higher. For more information about the effect your payment history has on your credit score, look here.
- Current Debts (30%) – How much debt are you currently carrying? How much credit do you have available to you? Lenders will look at these amounts to determine if you’ll be able to manage the amount of credit you are applying for. Keeping your usage under 30-35% of your limit will help keep your score healthy.
- Account History (15%) – How old are your credit accounts? Do you have a mix of older and newer products in your file? Creditors like to see that you have been able to manage credit over time. The higher the average age of your accounts, the better the impact on your credit score. Want to know how the length of your credit history affects your credit score? Read this.
- Number of Inquiries (10%) – How often are you applying for new products? Too many recent hits on your file, especially in the last year, may lower your credit score and may be a red flag for lenders. To discover more facts about credit inquiries, click here.
- Types of Accounts (10%) – Do you have a mix of credit accounts on your credit file? Lenders like to see that you can handle revolving and installment credit, so a variety of accounts will affect your credit score in a positive way.
You can access your credit report and credit score anytime, by contacting one of the CRAs. Since the information reported to each one varies, with your creditors, it’s a good idea to pull reports from both companies, at least once a year.
It’s important to note that others can look at your credit file too. If you are currently seeking employment or a rental property, you should know that potential employers and landlords may take a look before they decide to hire you or rent to you. Insurance companies may also pull your report before they approve your application.
What Does Having a Good Mix of Credit Mean?
Your credit history begins to build as soon as you open your first credit account, whether it’s a loan, a credit card, or a cellular phone plan. Over time, it’s a good idea to maintain multiple accounts, and even better if you have a variety of account types since lenders like to see that you can manage payments in each area.
There are four main types of accounts that might appear on your credit report:
- Installment – Installment loans are paid back through regular payments or installments, that remain the same every month, for a specified amount of time. When the loan is fully paid, the money is no longer available to you. Example: car loans.
- Revolving – When you borrow money, up to a certain limit, and pay it back as you use it, or pay minimum monthly payments while carrying a balance, you are using revolving credit. Usually, you can continue to borrow and repay with this type of credit, until you (or your lender) decide to close the account. Example: credit cards. Click here to learn how to manage your revolving debt.
- Mortgage – If you finance the purchase of your home, your mortgage account may show up on your credit report, but not always. The mortgage companies who do report, typically report to only one of the two CRAs. It’s a good indicator of whether you make payments reliably, but this information isn’t used in the calculation of your credit score. What’s the difference between a collateral mortgage and a conventional one? Find out here.
- Open – With these accounts, you can borrow as much money as you need, up to a maximum limit. Payment of the balance is due by the end of each payment period. Example: monthly cellular phone plans.
What Credit Products Can Help with Diversity in Credit Accounts?
Maintaining diversity in the types of credit accounts you use can help boost your credit score. If you’ve already got revolving credit and would like to add an installment account, Loans Canada can help. We offer personal loans with installments you can afford. We might be able to help, even if you’ve had credit issues in the past. Ask us today about how adding a small personal loan to your credit mix can help increase your credit score.
Remember, it’s a good idea, to keep an eye on your credit all the time. Have a look at your credit report annually. Make sure that your personal information is accurate and check for errors in your accounts or account history, to help prevent identity theft and help you keep your credit score healthy.
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Margaret Johnson is in the business of helping Canadians tackle their debt, deal with credit issues, and regain control of their finances.