Credit Basics

What is a credit report?

A credit report is a history of how consistently you pay your financial obligations. Your credit report is created when you first borrow money or apply for credit. Once established and on a regular basis, the companies that lend money or issue credit cards to you (banks, finance companies, credit unions, retailers, etc.) send the credit reporting agencies specific and factual information about their financial relationship with you, This would include things like when you first opened up your account, if you make your payments on time, if you miss a payment, or if you have gone over your credit limit, etc.

The credit bureaus receive this information directly from the financial and retail institutions and retain it to help other lenders make decisions about granting you credit. Your credit report contains all the information received from those who have lent you money in the past and provides a picture of your financial health. For this reason, other lenders will request your report when they are determining whether or not to grant you a loan. Your credit report is a history that will help them determine what kind of lending risk you are; if you are likely to repay your financial obligations on time or not.

In addition to monitoring your activity on a regular basis, the credit bureau also assigns you a numerical ‘credit score’. This number ranges from 300 to 900 and anything in the 700s is considered to be good. To qualify for credit, you typically don’t want to be lower than 640, and definitely not lower than 600.

In general, the higher your score, the lower the probability that you will become delinquent on credit extended to you. While it is true many lenders use bureau scores to help them make lending decisions, understand that each lender will base its decision on more than just the score alone.

What is used to calculate my score?

While each credit bureau is different, both rely on similar algorithms to determine an individual score. Below is a breakdown of the factors used to calculate your score and the approximate weight each holds represented as a percentage:

Payment History (35%): Your credit score will be higher if you pay your bills on time, as opposed to making payments late or not making payments at all. If you have a poor payment history due to missed payments, declaring a bankruptcy or had a debt that went into collection then your credit score will certainly be lower. The more time that passes since you have paid any outstanding debts the less heavily these delinquencies will be weighed.

Current Debt (30%): Just because you’ve been approved for a $10,000 credit limit doesn’t mean you should use it all! The more credit you use in relation to the total you have available; the lower your score will drop. TransUnion recommends keeping your credit card balance below 50% of your allotted limit and ideally around 30%.

Length of Credit History (15%): The longer you’ve been proving yourself as a reliable borrower, the higher your score will be. Someone with a lengthy track record of paying back debts is likely to have a higher credit score.

New Credit (10%): If you have a lot of companies viewing your credit report in a short period of time a red flag may go up at and consequently lower your score. Regardless of the reasons, the bureaus see this activity as a sign of desperation indicating you may be in financial trouble and looking for a way out. Try to avoid applying for every credit card application that comes your way, or having too many car lots qualify you for an auto loan.

Types of Credit (10%): Your credit score is partly calculated based on the types of credit and loans you hold. These may include credit cards, retail accounts, instalment loans, mortgages, and consumer finance accounts. A healthy mix of all of these types will boost your score higher.