Managing My Credit Rating

Credit Scores and How they Work

Maybe you have been asked before “Do you know your Beacon Score?”  In many cases people have no idea that it’s a score used to determine ones credit worthiness… A Beacon Score is one of the credit scores that lender's use to measure a borrowers' risk based on a valuation of their financial history including details on credit cards, charge cards, loans, mortgages and overall payment history.

Typically a Mortgage Broker or Lender will complete the credit bureau after you have provided your Social Insurance Number Date of Birth and Name and Address – then the Credit Bureau is generated and then a Beacon Score is provided.

In a glace they can now access how well you pay your credit cards and loans.

A high credit score is an important factor in obtaining the mortgage and mortgage rate of your choice. It also makes it easier for an individual to get credit cards and loans on favourable terms, sometimes even with instant approvals. The higher your score, the lower the interest rate. The difference between a good and bad score can increase the cost of a loan by 3% or more.

Equifax is the most popular credit score used by lenders and results range from 300 to 900. The break-up is as follows:

  • 35% of the total score is based on payment history.
  • 30% is the amount owed and the available credit.
  • 15% is for length of credit history.
  • 10% is for types of credit used.
  • 10% is for search and obtaining new credit and inquiries.

A common misperception is that all inquiries will negatively impact your score instantly. The reality is that this may happen but its not a given and depends on your overall credit profile. The first inquiry can result in a drop of 5 to 20 points on the first mortgage inquiry, and will usually have a larger impact on the score for consumers with limited credit history and on consumers with previous late payments, but it's different in every case.

Factors that Affect Your Credit Score

1. You have a Short Credit History


Research shows that consumers with longer credit histories have better repayment risk than those with shorter credit histories. Also, consumers who frequently open new accounts have greater repayment risk than those who do not.

If you can maintain low balances and make sure your payments are on time, your score should improve as your revolving credit history ages.

2. You've been Looking for Credit in the past Year


If you've been recently been seeking credit, this is evident on your credit file based on the number of inquiries in the past 12 months. Research shows that consumers who are seeking new credit accounts are riskier than consumers who are not seeking credit.

For most consumers, a few inquiries on your credit file have a limited impact on BEACON/FICO scores and the best advice is to only apply for credit when you need it.

3. Not paying off your loans


If you have instalment loans and owe money on them, this does not mean you are a high-risk borrower. Paying down these instalment loans is very positive as it shows that you are willing and able to manage and repay debt, and a successful repayment history is good for your credit rating.

One measurement is to compare outstanding loan balances against the original loan amounts. If you took out a $1,000 line of credit 1 year ago and still owe $925, this shows that you may be having trouble paying off the debt. Generally, the closer the loans are to being fully paid off, the better the score.

4. Non-mortgage debt is too high


Consumers with larger credit amounts have a greater future repayment risk than those who owe less, resulting in the score measuring how much non-mortgage related debt you have.

Paying off your debts and maintaining low balances will help to improve your credit score. Consolidating or moving your debt into one account will usually not, however, raise your score, since the same amount is still owed.

Bankruptcy on the credit report is a borrower's worst nightmare, as it stays on record for almost 10 years and reduces your score by 200 points or more.

Top tips to improve your credit score

  • Review your credit report at least once a year.
  • Contact your creditors or the credit reporting agency to have errors on your credit profile corrected.
  • Apply for credit only when you need it.
  • Keep balances below 50% on your credit cards.
  • Pay off non-mortgage debt on time as quickly as possible.
  • Always make sure at least the minimum payment is made on time.

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