Keeping score on your credit

What it is, who can see it, and why it’s important

We often hear financial experts advising people to check their “credit score.” It’s a good idea to do that every year. That will give you an idea of what kind of risk lenders think you are. It can also signal if you’ve been a victim of identity theft and fraud. But very few people actually have a good idea of what a credit score is or how it’s compiled. Here’s my summary of what goes into a credit score, who keeps track, who can see it, and what you can do to raise a low score.

Your credit score starts with a credit report, which is a summary of your credit history. The credit report is created by two Canadian credit bureaus, Equifax and Transunion, which gather information from lenders when you borrow money or apply for credit for the first time.

Your credit score is a three-digit number that is calculated by the credit bureaus from information used in your credit report. The score is then used by various institutions to assess your creditworthiness and whether or not you’re a good risk.

So does that mean that anyone can see your report? No. It’s not open to everyone, but the list of those who can see it, including yourself, is a long one.

* Banks, credit unions, and other financial institutions.
* Credit card companies.
* Car leasing companies.
* Retailers.
* Mobile phone companies.
* Insurance companies.
* Governments.
* Employers.
* Landlords.

Credit scores range from a low of 300 to a high of 900. While there’s no magic number, the following ranges are generally used by lenders:

* 760-900: Excellent credit. Access to all types of credit.
* 725-759: Very good credit! Allows you to access a variety of credit choices.
* 660-724 Good credit. It’s a good middle-of-the-road score and will let you access most credit. However, you may not qualify for the lowest rates available.
* 561-659: Fair credit. May need work on debt repayment issues.
* 300-560: Poor credit. Take steps to improve your score.

Your credit report contains a surprisingly large amount of personal financial information, so it’s important to make sure it’s correct and up to date. For example, if you’ve made non-sufficient funds (NSF) payments or written bad cheques, that will be on your credit report. So will chequing and savings accounts that you’ve closed “for cause” because you owe money or have committed fraud. Bankruptcy or a court decision against you that relates to credit and debts sent to collection agencies are also part of the report.

Also included in your credit report is all the credit you use, such as credit cards, retail or store cards, lines of credit, and personal loans. Queries from these lenders and others who have requested your credit report in the past three years will also show up.

The report will also show registered items, such as a lien on a car that allows the lender to seize it if you don’t make payments. Consumer statements, fraud alerts, and identity verification alerts will show up as “remarks, as will factual information on account history, payment history, credit history, and public records (for example, bankruptcy or insolvency).

In short, just about everything involving your financial life will appear on the credit report. That’s why it’s vitally important to check your credit report for signs of identity theft or errors. Do this annually for both credit bureaus. Ensure that attempts have not been made to open credit cards, other loans, or mortgages in your name. And request any errors be corrected.

How a credit score is calculated

Your three-digit credit score is calculated from your credit report. Basically, you get points for actions that show you use credit responsibly, and you lose points for difficulty in managing credit. Your credit score will change over time as your credit report is updated.

Many factors affect your score, including how long you’ve had credit, the type of credit you’re using, a regular balance on your credit cards, a history of missed payments, the total amount of your debts, reaching your credit limit, frequency of attempts to get more credit, as well as debts sent to a collection agency, and insolvency or bankruptcy.

How to improve your credit score

Monitor your payment history. Your payment history is the most important factor for your credit score. To improve your payment history, make your payments on time (or at the very least, make the minimum payment), contact the lender right immediately if you can’t pay a bill, and never skip a payment – even if it’s in dispute.

Use credit wisely. Don’t max out your available credit or go over your credit limit. Keep credit use to less than 35% of your available credit. Maximum use of credit is a high risk factor, even if you pay your balance in full.

Use it or lose it – create credit history. The longer you have credit accounts and use them responsibly, the better your score. This is important, as newer credit accounts will lower your score, as will transfers from an older accounts. Keep an older account active even if you don’t need it, and make sure there is no fee for inactivity.

Don’t over-apply for credit. Each time you apply for additional credit (for example, responding to one of those endless credit card promos that come out during the year), a credit check is made by the lender, and is recorded as an inquiry by the credit bureau. Too many credit applications might raise a caution flag for lenders that you’re mismanaging your personal finances and need credit urgently to “solve” your problems.

Use different types of credit. Using just one type of credit product, such as a credit card, may lower your score. So try to diversify your credit profile with different instruments, such as a credit card, a personal line of credit, a car loan, or personal loan. But always stay within your means to repay.

To achieve and maintain a good credit score, pay your bills on time, lower your debts, and correct inaccuracies in your report. A proven record of sound financial management will have the most significant impact on your score.

Robyn Thompson, CFP, CIM, FCSI, is the founder of Castlemark Wealth Management, a boutique financial advisory firm specializing in wealth management for high net worth individuals and families. Contact her directly by phone at 416-828-7159, or by email at rthompson@castlemarkwealth.com for a confidential planning consultation.

Notes and Disclaimer

The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned are illustrative only and carry risk of loss. No guarantee of investment performance is made or implied. It is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. Please contact the author to discuss your particular circumstances.