Understanding your Credit Report
As credit has become more and more abundant in our society, your credit report, and thus your credit rating, has become more important in your daily life.
Your credit rating affects all aspects of your financial activities when it comes to borrowing money. Your credit rating also has the ability to affect the job you get, the apartment you rent, and even the ability to open a bank account.
Your credit report itself is simply a listing of all your mortgage and consumer debt. Here in Canada, the two main credit reporting agencies are Trans Union and Equifax. Both agencies have a credit history file on anyone who has ever borrowed money. Every time you borrow money or make a payment on a loan or credit card, the lender then reports the information about the transaction to these two agencies. In addition to credit information, you will also find liens and judgments on your credit report as well as your address and possibly your work history. The accumulation of all this information is called your credit report.
The information on your credit report varies based on your creditors and what they have reported about you. Potential lenders and others, such as employers, view your credit history as a reflection of your character. Whether we like it or not, our financial habits have a lot to say about the way in which we choose to live our lives.
The credit score, or beacon score, is a number which gives mortgage lenders an idea of your lending risk. Credit scores range from 300 to 900, the higher your credit score the better. The mortgage products and interest rate that you will qualify for are often determined by your credit score.
One thing that many people do not know is that you have the legal right to obtain a copy of your credit report. A mortgage professional can help you obtain a copy of this report and go through it with you to verify that all of the information is true and correct.
The good news is that your credit report is a working document. This means that you have the ability over time, to repair any damaged credit and increase your credit score. Your credit score is analyzed using 5 different categories, each influencing your score with varying weight:
Payment History: This accounts for around 35% of your score. Missing payments will have a negative effect on your score. It is very important that you ensure all payments are made on or before their due dates, and in the correct amount. Judgments, bankruptcies, collections and other public records are considered quite serious and have a significant detrimental impact on a credit score.
Utilization: This accounts for around 30% of your credit score. This is measurement of your credit balances relative to your credit limits. We always recommend that you keep you balances under 25% of your total available credit limit to maximize this 30% of your credit score.
History: This accounts for around 15% of your credit score. Quite simply, the longer you have had established credit the better. This is important to consider when deciding to close an account.
New Credit: This accounts for around 10% of your credit score. The more inquiries you have, the worse you will do in this section. There is an exception to that rule although: if you have multiple credit inquiries regarding mortgages or auto loans, the algorithm will allow a 30-day buffer for these two items specifically. For example, if an individual is looking for a mortgage and has multiple inquires regarding a mortgage application within 30-days, the system will count them as one. This allows people looking for a mortgage/auto loans not to be negatively affected by simply shopping around. However, this does not apply towards applications for other types of credit such as personal loans or credit cards.
Credit Mix: This accounts for the final 10% of your credit score. Having a mix of different types of credit reflected on your bureau will positively affect your score. However, having too many trade lines on your report can negatively affect your score.