What Is a Credit Score?

A credit score is a number between 300–850 that depicts a consumer’s creditworthiness. The higher the score, the better a borrower looks to potential lenders. A credit score is based on credit history: number of open accounts, total levels of debt, and repayment history, and other factors. Lenders use credit scores to evaluate the probability that an individual will repay loans in a timely manner.

KEY TAKEAWAYS

• A credit score plays a key role in a lender’s decision to offer credit.
• The FICO scoring system is used by many financial institutions.
• Factors considered in credit scoring include repayment history, types of loans, length of credit history, and an individual’s total debt.
• One metric used in calculating a credit score is credit utilization or the percentage of available credit currently being used.
• It is not always advisable to close a credit account that is not being used since doing so can lower a person’s credit score.

The credit score model was created by the Fair Isaac Corporation, also known as FICO, and it is used by financial institutions.⁵ While other credit-scoring systems exist, the FICO score is by far the most commonly used. There are a number of ways to improve an individual’s score, including repaying loans on time and keeping debt low. 

How Credit Scores Work

A credit score can significantly affect your financial life. It plays a key role in a lender’s decision to offer you credit. People with credit scores below 640, for example, are generally considered to be subprime borrowers. Lending institutions often charge interest on subprime mortgages at a rate higher than a conventional mortgage in order to compensate themselves for carrying more risk. They may also require a shorter repayment term or a co-signer for borrowers with a low credit score.

Conversely, a credit score of 700 or above is generally considered good and may result in a borrower receiving a lower interest rate, which results in their paying less money in interest over the life of the loan. Scores greater than 800 are considered excellent. While every creditor defines its own ranges for credit scores, the average FICO score range is often used:⁶

• Excellent: 800 to 850
• Very Good: 740 to 799
• Good: 670 to 739
• Fair: 580 to 669
• Poor: 300 to 579

Your credit score, a statistical analysis of your creditworthiness, directly affects how much or how little you might pay for any lines of credit you take out.

A person’s credit score may also determine the size of an initial deposit required to obtain a smartphone, cable service or utilities, or to rent an apartment. And lenders frequently review borrowers’ scores, especially when deciding whether to change an interest rate or credit limit on a credit card. 

Credit Score Factors: How Your Score Is Calculated

There are three major credit reporting agencies in the United States (Experian, Equifax, and Transunion), which report, update, and store consumers’ credit histories. While there can be differences in the information collected by the three credit bureaus, there are five main factors evaluated when calculating a credit score:

1. Payment history
2. Total amount owed
3. Length of credit history
4. Types of credit
5. New credit 

How to Improve Your Credit Score

When information is updated on a borrower’s credit report, their credit score changes and can rise or fall based on new information. Here are some ways a consumer can improve their credit score:

• Pay your bills on time: Six months of on-time payments is required to see a noticeable difference in your score. 
• Up your credit line: If you have credit card accounts, call and inquire about a credit increase. If your account is in good standing, you should be granted an increase in your credit limit. It is important not to spend this amount so that you maintain a lower credit utilization rate.
• Don’t close a credit card account: If you are not using a certain credit card, it is best to stop using it instead of closing the account. Depending on the age and credit limit of a card, it can hurt your credit score if you close the account. Say, for instance, that you have $1,000 in debt and a $5,000 credit limit split evenly between two cards. As the account is, your credit utilization rate is 20%, which is good. However, closing one of the cards would put your credit utilization rate at 40%, which will negatively affect your score.
• Work with one of the best credit repair companies: If you don’t have the time to improve your credit score, credit repair companies will negotiate with your creditors and the three credit agencies on your behalf, in exchange for a monthly fee.

Now or in the future, which of the following do you hope to purchase?

1. An automobile
2. A home
3. A post-secondary education
4. All of the above
5. None of the above

If you answered a, b, c or d, chances are you will one day (if not already) request the use of credit to assist in purchasing one of these expensive items. If you answered with e, well then, um, let’s just hope you didn’t answer with e…

When credit is requested from a lender (to purchase any of the above items and more), credit history is used to decide whether or not to grant that person credit. As we discussed earlier, the lender may look at either a credit report and/or a credit score to determine this. If a person has a negative credit history, or no credit history, they may not be able to obtain credit. Why? Well, let’s use the recurring example of your irresponsible friend that always asks to borrow cash. If you knew that he/she wouldn’t pay it back on time, would you continue to let him/her borrow it? Probably not. Or, if you were unsure that they would pay it back (meaning they don’t have credit history) would you let them borrow it? You might let them borrow $20, but you certainly wouldn’t let them purchase a house from you. Make sense?

In addition, a person’s credit history helps a lender determine the terms of credit granted, which could include the interest rate paid and length of the loan. Over a lifetime, a person will pay more for credit (in higher interest rates and fees) if they have a lower credit score. The table below illustrates that if you have a lower credit score you will have a higher interest rate which leads to a higher monthly payment.

This is based upon a 30-year fixed mortgage rate for a $300,000 loan
Credit Score (FICO)	Interest Rate Granted	Monthly Payment Made	Total Amount Paid for Credit (30 years)
760	5.9%	$1,787	$643,320
650	7.2%	$2,047	$736,920
590	9.3%	$2,500	$900,000

Note: As your credit score decreases, your interest rate increases.

A person’s credit history affects their ability to obtain credit and the terms of credit granted, but would you believe that credit history can also affect parts of your life that are not related to receiving credit? The truth is, more than potential lenders check a person’s credit history.

• Insurance companies may use the information to decide whether you can get insurance and to set the rates you will pay
• Employers may use your credit report, if you give them permission to do so, to decide whether to hire you
• Telephone and utility companies may use information in your credit report to decide whether to provide services to you
• Landlords may use the information to determine whether to rent an apartment to you

Basically, your credit history is important because lenders, insurers, employers, and others may use it to assess how you manage financial responsibilities. Wait, so we’re telling you that if you have a negative credit history, you could be without insurance or utilities, unemployed and HOMELESS? Now do you understand how important it is to have a positive credit history? Since it is so important, please remember the following about the importance of credit history:

• Your credit history determines your ability to obtain credit.
• Your credit history determines the terms of credit granted, such as the interest rate you will pay.
• Your credit history affects much more than your ability to receive credit. Credit history can affect your ability to obtain a job, rent a place to live, and obtain utility services.

A fair credit score is generally considered to be a FICO^® Score^☉  of 580 to 669. The FICO^® Score was created by the Fair Isaac Corporation and is used by many lenders as they make lending decisions. FICO^® Scores often range from 300 to 850 and most FICO^® Scores fit into one of five categories: very poor, fair, good, very good and exceptional.

There are several different types of credit scores and most of them are based on the information collected in your credit reports. FICO^® Scores and scores by VantageScore are two of the most common types, and the specific ranges may vary from score to score.

Why Do I Need to Know My Credit Scores?

You need to know your credit scores because they are often used by lenders and banks as they decide whether to offer you credit, such as a credit card, mortgage or auto loan. Having a fair credit score can influence the terms of a credit offer, such as the mortgage interest rate or how much the required down payment will be.

Do I Have a Fair Credit Score?

Once you know your FICO^® Score, you can check to see what range it falls into by using the table below. About 17% of Americans have fair credit scores and a FICO^® Score from 580 to 669 falls in the fair credit score range. A credit score below 580 is considered to be very poor.

FICO^® Score Ranges:

Credit Score	Rating	% of People	Impact
300-579	Very Poor	16%	Credit applicants may be required to pay a fee or deposit, and applicants with this rating may not be approved for credit at all.
580-669	Fair	17%	Applicants with scores in this range are considered to be subprime borrowers, meaning their credit standing is less than what is normally desired.
670-739	Good	21%	Only 8% of applicants in this score range are likely to become seriously delinquent in the future.
740-799	Very Good	25%	Applicants with scores here are likely to receive better than average rates from lenders.
800-850	Exceptional	21%	Applicants with scores in this range are at the top of the list for the best rates from lenders.

Do I Want a Fair Credit Score?

You want the best credit scores possible in order to help save yourself money when you need to take out a loan or get credit. Fair credit scores mean you are seen as sub-prime by lenders, which means you are likely going to get less favorable terms than someone with a higher credit score. That can mean higher interest rates and even outright rejection.

Improving your credit scores over time, moving from fair to good and beyond, will boost the chances that you’ll qualify for credit with more favorable terms. In general, having good credit scores may help improve your financial situation. Here are some reasons why you would want to earn higher credit scores:

1. Higher credit scores can earn you lower interest rate loans for your home loans, car loans, student loans and personal loans.
2. Higher credit scores can make for lower monthly payments on your loans. If you receive a lower interest rate, then you likely will have lower monthly payments required.
3. Credit card offers will provide better credit card rewards and deals such higher percentage cash back choices, 0% interest rates and higher credit limits.
4. Having higher credit scores can make it easier to be approved for renting a home or apartment.

What Lowers My Credit Score?

The behaviors that can impact your credit scores vary depending on which credit scoring model is being used. The most commons items that can affect your credit score are:

• Late Payments: When bills for things like loans and credit cards are paid after the due date.
• Poor Payment History: The total number of late payments and how late the payments are.
• High Credit Utilization Rate: How much you owe compared to how much credit is available to you.
• Credit History and Mix: The length of time you’ve had credit along with the different types of credit accounts you have.
• Total Amount of Debt: All of your outstanding debt, across all of your credit accounts.
• Negative Public Records: Bankruptcies and civil judgments.
• Credit Inquiries: When you apply for too much credit within a short period of time.

How Can I Improve My Credit Score?

Improving your credit scores really comes down to the same categories of behavior that can get your score in trouble. You’ll just need to throw the car into reverse and start doing the “right things.” If you stay on course, over time your credit scores will likely improve, and so can your access to credit. Those actions include these:

1. Pay Your Bills: Establishing a positive payment history is the single most important factor in many credit scoring models. So, pay your bills on time and if possible, pay them off in full each month per the agreement you have with the loan or card issuer.
2. Improve Your Credit Utilization Ratio: Either lower the amount of credit that you have in use, or increase your credit limits to ensure that you don’t use more than 30% of your available credit at any given time.
3. Don’t Over Apply: Only apply for credit when you really it and don’t apply for a bunch of different lines of credit at the same time.
4. Look for Errors: Pay close attention to the information on your credit reports and be sure to dispute any errors that you come across.

Establishing good credit habits like these can make a difference and help you improve your credit scores over time.

Highlights:

• Credit reports from the three nationwide credit bureaus do not usually contain credit scores
• You may be able to get a credit score from your credit card company, financial institution or loan statement
• You can also use a credit score service or free credit scoring site

Many people think if you check your credit reports from the three nationwide credit bureaus, you’ll see credit scores as well. But that’s not the case: credit reports from the three nationwide credit bureaus do not usually contain credit scores. Before we talk about where you can get credit scores, there are a few things to know about credit scores, themselves.

One of the first things to know is that you don’t have only one credit score. Credit scores are designed to represent your credit risk, or the likelihood you will pay your bills on time. Credit scores are calculated based on a method using the content of your credit reports.

Score providers, such as the three nationwide credit bureaus – Experian and TransUnion — and companies like FICO use different types of credit scoring models and may use different information to calculate credit scores. Credit scores provided by the three nationwide credit bureaus will also vary because some lenders may report information to all three, two or one, or none at all.  And lenders and creditors may use additional information, other than credit scores, to decide whether to grant you credit. 

So how can you get credit scores? Here are a few ways:

• Check your credit card, financial institution or loan statement. Many credit card companies, banks and loan companies have started providing credit scores for their customers. It may be on your statement, or you can access it online by logging into your account.
• Purchase credit scores directly from one of the three major credit bureaus or other provider, such as FICO.
• Use a credit score service or free credit scoring site. Some sites provide a free credit score to users. Others may provide credit scores to credit monitoring customers paying a monthly subscription fee.

In addition to checking your credit scores, it’s a good idea to regularly check your credit reports to ensure that the information is accurate and complete.

You’re entitled to a free copy of your credit reports every 12 months from each of the three nationwide credit bureaus by visiting www.annualcreditreport.com. You can also create a myEquifax account to get six free Equifax credit reports each year.  In addition, you can click “Get my free credit score” on your myEquifax dashboard to enroll in Equifax Core Credit™ for a free monthly Equifax credit report and a free monthly VantageScore® 3.0 credit score, based on Equifax data. A VantageScore is one of many types of credit scores.

If you find information you believe is inaccurate or incomplete on your credit reports, contact the lender or creditor. You can also file a dispute with the credit bureau that provided the report. At Equifax, you can create a myEquifax account to file a dispute. Visit our dispute page to learn other ways you can submit a dispute.

1. Get your free credit report and scores Before you start working on your credit, you will need to check your credit report. It’s also a good idea to find out your FICO score with all three credit bureaus. You can get your free credit report once a year on the Government website www.annualcreditreport.com. Free credit scores are available from Credit Sesame and Credit Karma. They even have great apps for android and iPhone, where you can check your credit scores anytime and get credit alerts anytime there is any activity on your credit file.

2. Identify the negative accounts Now that you have your credit report go through it and highlight accounts with a negative status. You will also need to highlight any late payments, collection accounts, or anything else that is and credit inquiries. Make sure your personal information is correct, including your address, employer, and phone number. Items to focus on Late payments Collection accounts Credit inquiries Inaccurate past or present address

3. Pay off your credit card debt Your credit utilization ratio is the amount of credit card debt you have compared to the credit limit. Keeping this ratio below 15% is essential. Your credit utilization ratio has a massive 30% impact on your FICO (Score model used by mortgage lenders) score. Only your payment history (30%) has a more significant impact on your overall credit rating. If you’re carrying high debt on your credit cards, then your credit rating is suffering, majority. Pay your credit card balances down to zero, or as close to zero as you can the have your credit utilization rate as low as possible to maximize your FICO score.

Secured credit cards If you don’t have a credit card, you will need to get one or two to help improve your credit score. Getting a credit card when you have bad credit is very difficult if you don’t know where to look. 6 Best Secured Credit Cards to Rebuild Your Credit A secured credit card works similarly to an unsecured credit card. The only difference is that with a secured card, you will need to pay a deposit equal to your credit limit. As an example: If you get a secured credit card with a $500 credit limit, you will be required to pay a refundable $500 deposit to secure the loan. After 6-12 months of on-time payments, the credit card issuer may convert your account to an unsecured card and refund your deposit.

4. Contact the collection agencies If you have collection bills with small balances or balances, you don’t mind paying you should call the collection agency. Tell them you wish to do a pay for delete. A pay-for-delete is just what it sounds like, you pay the amount owed, and they remove the negative account from your credit report entirely. Make sure you write down the person’s name and extension you spoke with. You also need “pay for delete” letters in writing from the collection agency, showing they agree to remove the account from your report entirely if you pay the agreed-upon amount. In some cases, you can settle the account for less than you owe, but many will want you to pay in full if they are deleting it from your credit history.

Do you feel like you need an advanced degree to figure out what is affecting your credit score? Good news is you don’t—it can actually be rather simple.

Behind the number itself (credit scores typically range from 300 to 850), there are five main factors used to calculate credit scores. Lenders use those scores to figure out how likely you are to pay back your debt—thus those scores are often the deciding factor in whether you will get a new loan.

As your financial profile changes, so does your score, so knowing what factors and types of accounts affect your credit score give you the opportunity to improve it over time.

Top 5 Credit Score Factors

While the exact criteria used by each scoring model varies, here are the most common factors that affect your credit scores.

1. Payment history. Payment history is the most important ingredient in credit scoring, and even one missed payment can have a negative impact on your score. Lenders want to be sure that you will pay back your debt, and on time, when they are considering you for new credit. Payment history accounts for 35% of your FICO^® Score^☉ , the credit score used by most lenders.
2. Credit utilization. Your credit utilization ratio is calculated by dividing the total revolving credit you are currently using by the total of all your revolving credit limits. This ratio looks at how much of your available credit you’re utilizing and can give a snapshot of how reliant you are on non-cash funds. Using more than 30% of your available credit is a negative to creditors. Credit utilization accounts for 30% of your FICO^® Score.
3. Credit history length. How long you’ve held credit accounts makes up 15% of your FICO^® Score. This includes the age of your oldest credit account, the age of your newest credit account and the average age of all your accounts. Generally, the longer your credit history, the higher your credit scores.
4. Credit mix. People with top credit scores often carry a diverse portfolio of credit accounts, which might include a car loan, credit card, student loan, mortgage or other credit products. Credit scoring models consider the types of accounts and how many of each you have as an indication of how well you manage a wide range of credit products. Credit mix accounts for 10% of your FICO^® Score.
5. New credit. The number of credit accounts you’ve recently opened, as well as the number of hard inquiries lenders make when you apply for credit, accounts for 10% of your FICO^® Score. Too many accounts or inquiries can indicate increased risk, and as such can hurt your credit score.

Types of Accounts That Impact Credit Scores

Typically, credit files contain information about two types of debt: installment loans and revolving credit. Because revolving and installment accounts keep a record of your debt and payment history, they are important for calculating your credit scores.

• Installment credit usually comprises loans where you borrow a fixed amount and agree to make a monthly payment toward the overall balance until the loan is paid off. Student loans, personal loans, and mortgages are examples of installment accounts.
• Revolving credit is typically associated with credit cards but can also include some types of home equity loans. With revolving credit accounts, you have a credit limit and make at least minimum monthly payments according to how much credit you use. Revolving credit can fluctuate and doesn’t typically have a fixed term.

A credit history is the record of how a person has managed his or her credit in the past, including total debt load, number of credit lines, and timeliness of payment. Lenders look at a potential customer’s credit history to decide whether or not to offer a new line of credit, and to help set the terms of the loan. Employers and landlords may use credit histories to evaluate job candidates or potential renters.

Deeper definition

A credit history offers a detailed look at how many lines of credit — bank loans, mortgages, credit card accounts — you have. Credit bureaus monitor your credit history, and they generate credit reports that detail your credit history at your request or for lenders or other institutions that need to review your creditworthiness.

Your credit history details how many inquiries there have been for credit reports, in addition to any negative actions taken against you, such as property liens or court judgments against you by creditors. The information contained in your credit history is used to calculate your FICO score. Higher FICO scores indicate better creditworthiness.

A good credit history makes it easier for you to obtain credit, while a bad credit history may prevent you from borrowing or significantly reduce your options. If you have a history of not paying bills on time, or you’ve filed for bankruptcy or had accounts go into collection, you may have more trouble doing everything, from finding a place to live to getting a job.

Got bad credit? Bankrupt has the tools you need to consolidate debt.

Credit history example

Antonio has three credit cards listed in his credit history, which details how long he’s had each card, the spending limit on each card, and how much he owes. He also has a car loan and a mortgage, both of which are recorded in his credit history. With most of his funds tied up in his shipping business, Antonio has maxed out his credit cards in an ill-considered plan to help out a friend who has relationship problems.

With the economy in recession, Antonio’s business is in trouble and his friend is unable to pay back the money he borrowed via Antonio’s credit cards, putting Antonio at risk of bankruptcy. He would like to take out a loan to consolidate his debt, but when potential lenders examine his credit history, they demand a painfully high rate of interest.

Do you feel like you need an advanced degree to figure out what is affecting your credit score? Good news is you don’t—it can actually be rather simple.

Behind the number itself (credit scores typically range from 300 to 850), there are five main factors used to calculate credit scores. Lenders use those scores to figure out how likely you are to pay back your debt—thus those scores are often the deciding factor in whether you will get a new loan.

As your financial profile changes, so does your score, so knowing what factors and types of accounts affect your credit score give you the opportunity to improve it over time.

Top 5 Credit Score Factors

While the exact criteria used by each scoring model varies, here are the most common factors that affect your credit scores.

1. Payment history. Payment history is the most important ingredient in credit scoring, and even one missed payment can have a negative impact on your score. Lenders want to be sure that you will pay back your debt, and on time, when they are considering you for new credit. Payment history accounts for 35% of your FICO^® Score^☉ , the credit score used by most lenders.
2. Credit utilization. Your credit utilization ratio is calculated by dividing the total revolving credit you are currently using by the total of all your revolving credit limits. This ratio looks at how much of your available credit you’re utilizing and can give a snapshot of how reliant you are on non-cash funds. Using more than 30% of your available credit is a negative to creditors. Credit utilization accounts for 30% of your FICO^® Score.
3. Credit history length. How long you’ve held credit accounts makes up 15% of your FICO^® Score. This includes the age of your oldest credit account, the age of your newest credit account and the average age of all your accounts. Generally, the longer your credit history, the higher your credit scores.
4. Credit mix. People with top credit scores often carry a diverse portfolio of credit accounts, which might include a car loan, credit card, student loan, mortgage or other credit products. Credit scoring models consider the types of accounts and how many of each you have as an indication of how well you manage a wide range of credit products. Credit mix accounts for 10% of your FICO^® Score.
5. New credit. The number of credit accounts you’ve recently opened, as well as the number of hard inquiries lenders make when you apply for credit, accounts for 10% of your FICO^® Score. Too many accounts or inquiries can indicate increased risk, and as such can hurt your credit score.

Types of Accounts That Impact Credit Scores

Typically, credit files contain information about two types of debt: installment loans and revolving credit. Because revolving and installment accounts keep a record of your debt and payment history, they are important for calculating your credit scores.

• Installment credit usually comprises loans where you borrow a fixed amount and agree to make a monthly payment toward the overall balance until the loan is paid off. Student loans, personal loans, and mortgages are examples of installment accounts.
• Revolving credit is typically associated with credit cards but can also include some types of home equity loans. With revolving credit accounts, you have a credit limit and make at least minimum monthly payments according to how much credit you use. Revolving credit can fluctuate and doesn’t typically have a fixed term.

Insurance carriers use credit scores as part of their calculations to determine the level of risk you would pose to them as an insured. They have found a direct correlation between credit scores and claim activity. Knowing that, it’s important to keep your credit scores in good shape so that your insurance premiums stay in line.

Here are 10 ways to increase your credit score by 100 points – most often this can be done within 45 days.

Check your credit report. Get a free credit report from each of the three credit reporting agencies (Equifax, Experian and TransUnion) once a year at annualcreditreport.com. Look for errors that lower your credit score and take action to correct them. Review the negative factors in the report and work on improving them, such as paying bills on time or reducing debt.

Pay your bills on time. Set up automatic payments using your bank’s bill pay service or sign up for e-mail alerts from your credit card company if you sometimes have trouble paying bills before the due date.

Pay off any collections. Paying off a collection will increase your score, but be aware that the record of a debt having gone into collection will stay on your credit report for seven years.

Get caught up on past-due bills. If you missed a payment, get current as soon as you can. A missing payment can lower your score by as much as 100 points. It may take a some time for this black mark to fade from your credit report, but take heart: your credit score usually depends more on your most recent activity than on past credit problems.

Keep balances low on your credit cards. A common rule of thumb is to keep the balance at or below 10 percent on each line of credit to improve your credit score. A balance close to or over the limit will significantly reduce your credit score.

Pay off debt rather than continually transferring it. While a balance transfer to pay zero interest or a lower interest rate on your debt can be worthwhile, make sure you pay down the balance before increasing your debt load. FICO says paying down your overall debt is one of the most effective ways to boost your score.

Don’t close paid-off accounts. Closing unused credit card accounts reduces your available credit and can lower your credit score. Keeping them open and unused shows you can manage credit wisely. And think twice before closing older credit card accounts, because a long credit history improves your score.

Shop for new credit over a short time period. If you are shopping for a mortgage, a car loan or a credit card, lenders typically pull your credit report to see if you qualify and to determine the rate they will charge. Too many inquiries over time can negatively impact your score, but if you cluster these applications within a few days or a week, the FICO scoring system will recognize that you are comparing rates for a single new loan or credit card rather than attempting to open multiple new lines of credit.

Have a mix of credit types. FICO prefers to see consumers with both installment loans and credit cards . If you are repaying student loans or have a car loan or a mortgage, then having one or two credit cards is also a good idea. While having too many credit cards can be a negative factor, you should have at least one to prove you can handle credit appropriately.

Apply for new credit sparingly. Only apply for new credit when you actually need it and not simply to boost your available credit. Opening several new credit accounts in a short time frame can lower your score.

In Canada, credit scores range from 300 (just getting started) up to 900 points, which is the best score. According to TransUnion, 650 is the magic middle number – a score above 650 will likely qualify you for a standard loan while a score under 650 will likely bring difficulty in receiving new credit.

Lenders who pull your credit bureau file may see a slightly different number than you see when you pull your own file.  This is due to the fact that each creditor applies a specific set of risk rules, giving and taking points for different purposes or preferences. This proprietary method of scoring will make a difference in the final calculation. The score you pull for yourself is calculated using an algorithm created for consumers that approximates these different formulas, and should still be in the same numerical range as the lenders’ scores.

Order your credit report from both credit reporting agencies in Canada – Equifax and TransUnion – at least once per year for free (when requested by mail, fax, telephone, or in person), and you can pay to see your credit score if you choose.

How can a low credit rating affect my life?

Credit scoring is used by lenders, insurers, landlords, employers, and utility companies to evaluate your credit behaviour and assess your creditworthiness.

1. Applying for a loan. Your credit score will be a big factor into the decision of whether you are approved or denied your application for more credit. Your credit score will also affect the interest rate and credit limit offered to you by the new credit grantor – the lower your credit score, the higher the interest rate will be and the lower the credit limit offered  – the reason for this is you are considered more of a credit risk.

2. Applying for a job. A potential employer may ask your permission to check your credit file and based on what they read, they may decide not to hire you due to your poor credit history. Yes, having bad credit could cost you a job!

3. Renting a vehicle. When you sign an application to rent a car, the rental company can check your credit history to determine what their risk may be when they loan you their property. So although you are not applying for credit, the application documents you sign provide your written permission to access your credit information.

4. The same is true when applying for rental housing – the landlord may assess your tenant worthiness and their risk by factoring in your credit rating and score, and they could pass you over for someone with a better credit rating.

What information is used to calculate my credit score, and what factors will lower my score?

If you have tried looking on the consumer reporting agencies’ (CRAs, also know as Credit Bureaus) websites, you have seen they provide VERY little information as to how your credit score is calculated. They believe this information is proprietary and therefore their “secret”. They do, however, provide a list of the main factors which affect your credit score:

1. Payment History
Equifax says: “Pay all of your bills on time. Paying late, or having your account sent to a collection agency has a negative impact on your credit score.”
TransUnion says: “A good record of on-time payments will help boost your credit score.”

2. Delinquencies
Equifax lists: “Serious delinquency; Serious delinquency, and public record or collection field; Time since delinquency is too recent or unknown; Level of delinquency on accounts is too high; Number of accounts with delinquency is too high”
TransUnion lists: “Severity and frequency of derogatory credit information such as bankruptcies, charge-offs, and collections”

3. Balance-to-Limit Ratio
Equifax says: “Try not to run your balances up to your credit limit. Keeping your account balances below 75% of your available credit may also help your score.”
TransUnion says: “Balances above 50 percent of your credit limits will harm your credit. Aim for balances under 30 percent.”

Ok, so avoid maxing out your credit – because if you don’t really need more credit you’ll be able to get it, and if you do really need it then you are more of a risk.(Funny how that works)

4. Recent Inquiries
Equifax says: “Avoid applying for credit unless you have a genuine need for a new account. Too many inquiries in a short period of time can sometimes be interpreted as a sign that you are opening numerous credit accounts due to financial difficulties, or overextending yourself by taking on more debt than you can actually repay. A flurry of inquiries will prompt most lenders to ask you why.”
TransUnion says: “Avoid excessive inquiries. When a lender or business checks your credit, it causes a hard inquiry to your credit file. Apply for new credit in moderation.”