Credit Scores And How Lenders Assess Risk
Your credit score is a 3 digit number assigned to you by lenders that show how much of a credit risk you are. The higher the score, the better the offer that comes your way. A lower score? You could have a tough time getting credit cards, loans and even housing (renting or buying). With this in mind, we will look at the 5 areas that lenders use for assessing credit risk and how some changes in the way you manage risk can help to improve your score.
Risk Factors For Your Credit Score
- Payment History (35%) To begin with, they look at your ability to keep to the payment terms that you agreed to when you signed your contract, this means your payments are on time. Furthermore, those payments are for no less than their stated minimum payment (more is always better!). Late or missed payments, along with undersized payments which are less than the minimum will result in your credit score taking a downward dip. It also can result in your interest rate going up and seeing your credit limit lowered.
- Credit Utilization (30%) Carrying a high balance on your credit card or across all of your accounts is risky behaviour. Creditors can see that as you are spending beyond what you are capable of repaying – which makes you a risk and it will show in your credit score.
- Length of Credit History (15%) The longer you keep your lines of credit open, the easier it is for lenders to see how you handle your credit. For better or for worse, information will ‘age’ off of your report. Different kinds of information have their own shelf life on your account. For example, a credit inquiry will stay on your report for no less than 3 years, while a bankruptcy will linger for 6 years on your file from your date of discharge. A second bankruptcy will stay on your file even longer.
- New Credit Applications (10%) This particular element includes the number of credit checks in the last five years. It also factors in the number of new accounts recently opened and how long those accounts have been in use before you apply for new credit. A credit application spree can make you look desperate for additional credit and can negatively impact your score.
- Credit Mix (10%) There are two types of credit, revolving and installment. Revolving credit includes credit cards and lines of credit because any money paid can be re-borrowed again. Installment accounts include loans for cars, mortgages and other personal loans. Installment loans have a specific number of payments and a set end-date.
Ultimately, if you want to improve your credit score then you will need to address whatever issues you find within these 5 areas which include:
- Make your payments according to the agreement that you have signed. Know your agreement and set reminders on your calendar a week before your payments are due.
- Use 35% or less of your credit limit as recommended by the Financial Consumer Agency of Canada.
- Keep all of your good credit relevant and on your credit report to increase your positive credit history.
- Hard credit checks are where the credit dings come from. Soft checks don’t count nor does it count when you check your own credit.
- Check your credit report for errors and dispute/correct them through TransUnion and Equifax.
- Only apply for the credit you need and treat it responsibly.
At PYLO Finance Inc., we believe that understanding your credit means that you can make better financial decisions. Our team is available if you have questions about about how a loan can help provide you with positive reporting on your credit history and improve your score.