How is Your Credit Score Calculated?

Before we get into how you calculate your credit score, let’s first define exactly what a credit score is for those who don’t know.

To put it simply, your credit score is a 3-digit number that indicates how likely you are to be accepted for credit.

Based on your credit report, it shows lenders how you’ve handled paying the debt in the past.

This credit can come in several forms, from personal loans to credit cards, mortgages and overdrafts.

High credit score 

If you have a high credit score, you’re perceived to be low risk and are therefore considered more attractive to lenders.

Reinforcing that you will be able to meet your repayments on time, it ensures that your application has a higher chance of being accepted.

From acquiring a high credit score, you might also be able to attain cheaper interest rates – a benefit that saves you money in the long run.

Low credit score

On the other hand, if you have a low credit score, lenders might perceive you to be high risk.

This could be the result of you not covering your prepayments on time or could be because you haven’t used credit before.

If you’ve defaulted on payments, lenders may take two actions.

They might either reject your credit application or simply increase the interest rates.

There are some actions you can take to rebuild your score.

So how is your credit score calculated?

To calculate your credit score, a credit reference agency takes into account certain factors.

This helps them to create a report and assess the level of risk associated with lending money to you.

These will typically include the following:

Your payment history

One of the first things that will be looked at when calculating your credit score is your payment history.

Giving a clear indication as to your ability to pay back the debt on time, it will include information as aforementioned, about credit cards, student loans, mortgage loans, etc.

Making up a large portion of your credit score, it will determine how many past payments that you’ve made, if you have used any collection activities, filed for bankruptcy at any point, how many accounts that you regularly use, etc.

The length of your credit history 

For those who have had credit for many years, it’s easy for the credit reference agency to build a credit report based on the information.

If you haven’t used credit very frequently, then it’s harder to determine the risk of lending them money.

Time is, therefore, a large factor in identifying what your credit score is and how responsible you’ll be at making your repayments.

Showcasing what credit you have active, how long certain debts have been on there for, what the first thing was that you obtained credit for was, etc. this could make a huge difference to whether a creditor will lend to you.

Keep in mind that if you’ve previously filed a Consumer Proposal, filed for bankruptcy or been on a debt management program then your credit history will be affected.

What credit you’ve previously used 

Another factor that they will consider when calculating your credit score is what type of credit you’ve used in the past.

Although it’s not one of the most significant factors, it is still considered – especially if your credit report is lacking in other information.

Keep in mind, however, that you should only take out a credit card if you plan to use it responsibly.

It won’t improve your credit score just because you’ve taken out an account.

Hard Inquiries

If a lender and creditor check your credit if you’ve filed a credit application (such as a credit card, mortgage or auto loan), a hard inquiry can occur.

As they are tied to your application, they can have a direct impact on your credit score.

What you owe 

Another big factor that will be taken into account is the amount of consumer debt that you currently owe.

Important to the lender when you apply for new credit, it yet again shows how risky you’ll be to lend to.

For example, if you have a low credit score as you’re frequently in debt, then they might not want to lend to you.

Looking at the line of credit, loans you have and the amounts that you owe on each of the credit cards you own, it could be the difference between a high and low credit score.

Typically, if you are using more than 75% of your credit limit, then you’ll be thought of as financially unstable.

New credit inquiries 

If you are consistently applying for credit, you might be seen as riskier as it’s a sign that you’re in a negative financial situation.

Which is why it’s taken into account when calculating your credit score.

They will not only look at the inquiries but the dates of when accounts were open, how many accounts you have, etc.

Does one size fit all?

Keep in mind that although the above factors are commonly the most looked at when calculating a credit score, each individual’s situation is treated differently.

As all consumers’ spending habits and financial past’s differ, your credit score will weigh the factors out on a case-by-case basis.

By doing this, everyone will get a different credit score based on their unique credit report.

Alongside the above, a credit agency or lender will also consider several other factors – including the length of time that you’ve been employed, the worth of your assets and what your income is.

How to calculate your credit score

If you want to determine your credit score, there are certain websites that you can use; such as Equifax.

Keep in mind though, that for the majority of these resources you’ll have to pay a fee.

Which is why it’s a good idea to conduct some research around this beforehand.

Find out more today

If you have any enquiries about your credit score, how you can improve it or any other questions, don’t hesitate to get in contact with one of our local and Licensed Insolvency Trustees today.

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