How does a credit score work?

Wednesday, January 22, 2020 - 17:08

Rebuilding Credit

Anyone who’s borrowed money has a credit score. If you’re currently confronting a substantial amount of debt and don’t know how to start fixing your finances, one of your first steps should be to understand what your credit score means and what goes into calculating it. Here’s what you should know.

What Your Credit Score Means
Your credit score is used to determine your level of financial responsibility. Lenders use it to assess how likely you are to pay them back. Credit scores range between 300 and 900. Anything over 600 is usually acceptable, while a score under 550 is considered bad.

Different lenders have different minimum scores for lending money, so there’s no universal standard when it comes to getting a loan or a mortgage. Keep in mind that lenders willing to lend money to people with low credit scores will typically charge higher interest rates.

How Your Credit Score is Calculated
This is what goes into determining your credit score: 

  • Payment History (35%). Making payments on time is a key factor in establishing a good credit score. Missed or late payments and bankruptcies will result in a lower score, as will collections and consumer proposals.
  • Outstanding Debts (30%). As long as you pay your debts, you’re in good shape. However, the more money you’ve borrowed and have yet to pay back, the lower your credit score will be.
  • Credit History (15%). A long credit history says more about your financial habits than a short one. This is why it’s a good idea to start building your credit early, with small loans you’ll be able to pay back.
  • Recent Credit Inquiries (10%). Lenders will often inquire about your credit. Numerous recent requests to check your credit can negatively impact your score, although not as much as missed payments.
  • Credit Diversity (10%). Like credit inquiries, this isn’t a huge part of your credit score, but it matters. Having many different types of credit demonstrates an ability to manage your finances well. 

How To Repair Your Credit
It’s always possible to repair your credit, but you might need help. It can take up to three years before your credit score climbs back over 600. Debt and credit counselling can allow you understand your options. Some people may benefit from a change in spending habits, while others may need to consider a consumer proposal or even bankruptcy. 

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