The quality of your credit score can impact your life in many different areas, some of which you may not even be aware of.
Your credit score, or credit rating, plays a role in most if not all your financial transactions, and if you have a low credit score, your financial life could undoubtedly become more complicated if you don’t address it.
A low credit rating can not only affect your ability to be approved for loans and the interest rates you pay on those loans, it can even impact whether people will rent to you, whether employers will hire you, your insurance rates and more.
That being said, how is your credit score calculated? It is based on various factors, actually. In this article, we will talk about some of the things credit bureaus look at in calculating your credit score:
1. Your transaction history
One of the most important factors any credit bureau will look at when calculating your credit score is your payment history.
Do you pay your bills and debts on time, do you pay them in full, are there any missed payments, how frequently did the missed payments occur? All these factors and more can affect your current credit score.
However, your transaction history is not the only thing that will be looked at. Other things such as ongoing loans and any other debts you have will also be considered and can affect your current score.
2. Your credit history length
While not as important as the previous factor, your credit history length is of concern to credit bureaus as well. In many cases, the longer your payment history, the better the score you will have as the credit bureaus will have a record of your financial habits and payment consistency. This makes it easier for them to assess your credit worthiness.
Note that having “no payment history” can be viewed as just as negatively as having a “bad history” of transactions. A short credit history, or none at all, means credit bureaus and lenders do not know what to expect from of you, which means more uncertainty for them, and in turn more potential risk for lenders.
3. Your amount owed to creditors, also known as credit utilization
How much do you currently owe to creditors out of your total available credit? If you’re looking to borrow money, lenders need to know how leveraged you are before they lend to you. A credit bureau, and more importantly the person loaning you money, needs to know if you can handle the additional debt you are trying to take on. If your credit cards or lines of credit are maxed out, or at high levels, credit bureaus see this as a risk factor since you will be more likely to fall behind on payments.
Carrying a high level of debt will negatively impact your credit score and in turn your ability to borrow money.
4. Your current applications for money
The more applications and inquiries you have to borrow money, the bigger the red flag for the credit bureaus and creditors.
Credit bureaus see a high volume of loan, credit line and credit card applications as an indicator that you may be either struggling financially or taking on too much debt, both of which cause them to view you a high-risk borrower in their eyes. As such, this can significantly drop your credit score.
The more loans you apply for, the worse your credit score.
In short, the above four factors are some of the things credit bureaus consider when calculating your credit score.
Conversely, these are also things you can think about if trying to improve your credit score. For example, if you think you have too many applications for money, reduce the number of inquires for credit you make.
If you see that your credit history is filled with missed or late payments, start fixing it by paying your current payments on time and make sure you pay the minimum payment as required.
While repairing and boosting your credit score takes time and perseverance, it will pay off in the form of better interest rates and easier access to loans in the future, which can help you save plenty of money in the long run.
Paul Pickering and Associates specialize in insolvency counseling, consumer proposals, bankruptcies and resolving debt issues and more in London and surrounding area. If you need help with your debt or consumer credit in Ontario, call us today and we’ll get to work on improving your financial situation!