We thought it would be helpful to pass along a little information about understanding your credit score and some do’s and don’ts to be aware of. How you handle your credit now can affect your ability to get a mortgage as well as the rate you will receive.
Understanding your credit score 101
Driven by the financial industries desire for an equitable method of comparing the credit worthiness of borrowers, Fair Isaac & Co developed a credit measurement tool in the 1950’s called the FICO® score.
Now considered to be the industry standard, the FICO® score is used by most lenders from across Canada and the United States to assess lending risk.
FICO® score, BEACON® score, EMPIRICA® score
The three most recognized credit reporting agencies include Equifax, Experian and TransUnion, with Equifax being the most recognized agency in Canada. Known as a BEACON® score at Equifax, EMPIRICA® score at TransUnion and the Experian/Fair Isaac Risk Score at Experian, all use formulas developed by Fair Isaac & Co.
How is a FICO® score determined?
*In general terms, the FICO® score evaluates five main categories of information:
Payment history (35% of the overall score)
- Account payment information on specific types of accounts (credit cards, retail accounts, installment loans, finance company accounts, mortgage, etc.).
- Presence of adverse public records (bankruptcy, judgments, suits, liens, wage attachments, etc.), collection items, and/or delinquency (past due items).
- Severity of delinquency (how long past due).
- Amount past due on delinquent accounts or collection items.
- Time since (recency of) past due items (delinquency), adverse public records (if any), or collection items (if any).
- Number of past due items on file.
- Number of accounts paid as agreed.
Amounts owed (30% of the overall score)
- Amount owing on accounts.
- Amount owing on specific types of accounts.
- Lack of a specific type of balance, in some cases.
- Number of accounts with balances.
- Proportion of credit lines used (proportion of balances to total credit limits on certain types of revolving accounts).
- Proportion of installment loan amounts still owing (proportion of balance to original loan amount on certain types of installment loans).
Length of credit history (15% of the overall score)
- Time since accounts opened.
- Time since accounts opened, by specific type of account.
- Time since account activity.
New credit (10% of the overall score)
- Number of recently opened accounts, and proportion of accounts that are recently opened, by type of account.
- Number of recent credit inquiries.
- Time since recent account opening(s), by type of account.
- Time since credit inquiry(s).
- Re-establishment of positive credit history following past payment problems.
Type of credit used (10% of the overall score)
- Number of (presence, prevalence, and recent information on) various types of accounts (credit cards, retail accounts, installment loans, mortgage, consumer finance accounts, etc.).
Add it up and you get…?
- Each of the above noted factors, along with others, are assigned a value and a weight. The results of these factors are then added up and combined into a single number. FICO® scores can range from 300 to 800. The higher the number the better.
In general terms, borrowers with reasonable credit typical have FICO® scores, which range between 600 and 800.
A score takes into consideration all these categories of information, not just one or two.
No one piece of information or factor alone will determine your score.
The importance of any factor depends on the overall information in your credit report.
For some people, a given factor may be more important than for someone else with a different credit history. In addition, as the information in your credit report changes, so does the importance of any factor in determining your score. Thus, it’s impossible to say exactly how important any single factor is in determining your score – even the levels of importance shown here are for the general population, and will be different for different credit profiles. What’s important is the mix of information, which varies from person to person, and for any one.
Contact FamilyLending.ca for more information.