Knowing Your Credit Score

When applying for a mortgage or any loan for that matter, one of the ways the financial institution considering your application evaluates your credit worthiness is to view your credit history and resulting credit score. Despite the importance that lenders place on individual credit scores, it is surprising how many people have no idea what their personal credit score is, nor do they understand the factors that impact their score.

In Canada, the consumer reporting agencies commonly used by financial institutions to review individual credit scores are Equifax and TransUnion. These firms collect the credit history of consumers as reported by various credit-providing institutions as well as details on other credit events such as liens and bankruptcies.

When you apply for credit, the creditor contacts these agencies to review your credit history and, using that information, determines the potential risk of default you represent as a borrower. The following categories are typically evaluated to determine your credit score.

Payment History

As you would expect, past history is seen as an important indicator of future behaviour and for this reason, it is one of the most heavily weighted factors used to determine your credit score. If you have a less-than-ideal record of paying bills on time, you can expect this fact to be reflected in your credit score.

Credit Utilization

Closely related to payment history, is your credit utilization as this category tracks how much of your available credit you tend to use. For instance, if you pay only minimum amounts on your credit cards and allow your balances to hover near your credit limit, you will score poorly for this category.

Types of Credit

There are many types of credit that may appear on your credit report and the impact each credit type has on your score varies. Debt types that really impact your score include personal loans and car loans, lines of credit, and credit cards.

Surprisingly, student loans and mortgages do not have much of an impact on your score even though details for these loans may appear on your credit report. Be aware, however, that there is nothing preventing the lender from deciding that, even though your credit score may be quite good, a default on a student loan or missed mortgage payments makes you a greater risk.

Repeatedly Applying for Credit

Numerous applications for credit can have a detrimental effect on your credit score. Similar to the utilization of credit, having multiple sources of credit available, even if the balances are zero, will be considered as potential debt by the financial institution and this can lead to a lower score.

Lack of Established Credit

Finally, a lack of established credit can also hurt your score. Admittedly, this is not necessarily your fault, but without a track record of successfully managing credit, it is difficult for a lender to draw a well-informed decision regarding your ability to manage debt.

To create a credit history, consider taking out a credit card even if it has a very low limit. Use the card  to create some transactional history, but be sure to pay off the balance each month. This will help build your credit history and demonstrate that you are a responsible borrower.

Helpful Links

  • You can view sample reports and a key to understanding the rating systems used by both Equifax and TransUnion companies in this publication from the Financial Consumer Agency of Canada website.
  • Borrowell is an online lender that has partnered with Equifax to provide, free of charge, your latest credit report by filling in a web-based form. Click here for more information.

Pino Decina

EVP Residential Mortgage Lending
Home Trust Company

This post is intended for informational purposes only and is not to be considered financial advice.

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