April 5, 2017

A Borrower’s Guide to Understanding Credit Scores

By Lee Noble, VP of Business Development, Lendesk

Most people like to know what their credit score is, especially when they are in the market for a new credit product like a mortgage. But when you pay a fee to find out your credit score, and then find out that the number is different when you go to apply for a credit product, the experience can be a little baffling. Frustrating, even.

How Your Credit Score is Calculated

Your credit score and more broadly your credit bureau (report) can be based on a number of factors from your financial history. Whether you’ve written bad checks, had accounts closed due to owing funds, any existing credit products you have and their current standing, any debts, liens, bankruptcy claims, missed payments, or instances where you’ve gone over your credit limit. The report will also have all of the facts related to your accounts and borrowing history: when accounts were opened or closed, and the available credit or amount owing.

A score can range from 0-900, with an average Canadian score being 700.

Tips for improving your credit score

First and foremost, pay your bills on time! This is the largest contributor to your credit score.

Contrary to some popular opinion, having available credit lines is a good thing for your score, so long as you don’t max them out. If you’re going to dip into your credit card or Line of Credit, try to keep it below 30% of your limit. Ex. With a $10,000 limit, keep your balance below $3,000. Definitely don’t go over 70%, even if you’re paying it off monthly.

Age of credit is a factor too, so if you have lines of credit with no annual fees and no balance, it doesn’t hurt to keep them available as part of your emergency fund.

If possible, hold a variety of credit products – maybe Line of Credit (LOC), a credit card and a mortgage. Keep in mind that revolving credit like LOC’s or credit cards are seen as higher risk, so a personal loan or auto loan may be reflected more favourably.

Try to minimize the number of times you’re applying for new credit in a year and space out new car loan applications from mortgage or credit card applications.

Free Services That Offer Credit Scores

When you “pull” your credit score (or when a lender does to assess your risk), that action can affect your rating as well. But there are free services you can access that will produce a credit score for you, without affecting your record. Mogo, Borrowell, and Mopolo are examples of these.

What You See is Not Always What You Get

The score you receive from these services might be different from the one the broker or lender get when they pull your credit. Although the process of calculation is similar, the numbers can vary, for a number of reasons.

Most of the free services are accessing your score using a service called Equifax, and the score being presented is their Equifax risk score whereas lenders or brokers are seeing your “Beacon 9” score, as calculated by FICO – a partner of Equifax’s.

Just when you thought you were figuring this whole credit score thing out, there’s another provider to Equifax called TransUnion. For all intents and purposes, TransUnion scores are calculated similarly and generally much less widely used. But the presence of yet another scoring system only confuses matters even more.

If you visit one of the free services, or even if you pay for a subscription service to find out your score, there could be any number of other reasons why a lender or broker will have a different figure, and the differences could affect your ability to qualify for credit products. For that reason, having a bit of inside knowledge of the many variable can help manage your expectations, and make you a more informed borrower.