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Your credit score plays a leading role in your financial life. But what determines it? Below are the five elements considered by Equifax and TransUnion.
Did your bank refuse to grant you a loan or offer you a high interest rate? This may be due to your credit score. The following five elements are used to determine it.
The good news is that a low credit rating can always be improved by taking the right steps.
A credit score, which is also called a credit rating, is a number ranging between 300 and 900 that reflects your financial behaviour and reliability as a borrower.
Calculated primarily by Equifax and TransUnion, it is consulted by financial institutions when evaluating an application for a loan, credit card or line of credit. The higher your score, the more trustworthy you appear to lenders.
Before approving an application, financial institutions assess several factors of your financial situation including:
When assessing your file, your credit score is one of the most determining factors. It is calculated using five elements.
This makes up 35% of your credit score.
Your payment history plays the largest role in determining your credit score. Paying your bills, credit card balances, line of credit payments and loan payments on time shows that you’re a reliable borrower.
Conversely, payments that are more than 30 days late remain on your credit report for several years, regardless of the amount owed. The longer the delay, the greater the impact on your score.
This makes up 30% of your credit score.
Using more than 50% of your available credit can affect your score, even if you pay off the balance in full at the end of the month.
Tip: Try to maintain a credit limit that corresponds to approximately twice your monthly expenses. For example, if you usually put $250 per month on your credit card, a limit of $500 would be a good starting point.
This accounts for 15% of your credit score.
If you opened your account a long time ago, your lenders will be able to see your long-term repayment habits. And if you’ve maintained a good credit history for years, your credit score will be higher.
Tips:
They represent 10% of your credit score.
Each credit application that you submit is noted in your file. If you submit several applications, financial institutions will consider that you’re seeking many loans and are at risk of getting into debt. This can negatively affect your credit rating.
Tip: Submit several applications to different financial institutions at the same time. If you do this within a two-week period, the applications will count as only one credit inquiry on your file.
They represent 10% of your credit score.
Having a variety of different types of credit accounts can positively impact your credit rating.
Tip: It’s preferable to have different accounts (personal loan, car loan, line of credit, mortgage loan) rather than several of the same type of loan (several credit cards, for example) since this suggests that you’re at a high risk of getting into debt. However, you should bear in mind that having several different accounts can increase your risk of forgetting to pay a balance on time.
Lenders may view your credit score when you apply for a loan (line of credit or credit card, for example). This can give them an idea of your financial behaviour. However, your credit information cannot be consulted without your consent.
If your credit rating is low, your loan application could be refused. Alternatively, it could be accepted, but at a higher interest rate or on the condition that you provide guarantees or have an endorser.
However, in all cases, if you have a low score, you can bring it back up. Your situation can always be improved!
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