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.
Comments:
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
Creditscore
