Understanding Your Credit Score and Credit Worthiness

Which Canadian age group has the best credit scores?  Which has the worst?  What is yours and how can you improve it?  Knowing what is in your credit report is important.  If you have a poor credit history, it could be harder for you to get a credit card or a loan.  It could even affect your ability to rent a house or get hired for a job.

Credit reporting agencies keep track of how a person uses credit products, such as credit cards, loans and paying your bills.  This information is used to create your credit score and credit report.  These are some of the main tools lenders use when they decide whether to lend you money and how much they will charge to do so.

What is a credit score?  A credit score is a three-digit number that is calculated using a mathematical formula based on the information in your credit report.  You get points for actions that demonstrate to lenders that you can use credit responsibly, you lose points for things that show you have difficulty managing credit.  Categories typically weighted to make up your credit score are; payment history is 35%, accounts owed is 30%, length of credit history is 15% , new credit is 10% and credit mix is 10%.

According to Equifax numbers released on Jan. 5, 2016 for the 2015 year:

• Canadians with credit scores of 750+ (safest risk rating) were 60.51% in October 2015
• Canadians with credit scores of 680 – 749 (average risk rating) were 21.40% as of October 2015
• Canadians with credit scores below 520 (extreme risk rating) were 2.85% as of October 2015
• Age group with highest percentage of Canadians with credit scores 750 and above: 65 and older
• Age group with highest percentage of Canadians with credit scores below 520: 25 and younger

What is a credit report?  Your credit report may contain some of the following:  personal information such as your name, date of birth, current and previous addresses, Social Insurance Number, driver’s licence and current and previous employers.

Credit History information such as credit accounts and transactions on credit cards and lines of credit and loans; phone and internet accounts, negative banking information such as closing accounts due to NSF cheques, bankruptcy and requests from lenders for your credit report will also be included in your credit report. Your personal information and credit history may affect how lenders view your creditworthiness.

There are many ways to improve your credit score:

1. Always make payments on time
2. Try to use less that 35 percent of your available credit (don’t keep your credit cards at the limit)
3. The longer you have had an account open and used it, the better it is for your score. (so, don’t close the oldest credit card you have in favor of a new one.  Use the old one occasionally to keep it active.)
4. If there are too many inquiries on your credit report, lenders may be concerned.
5. Having a mix of credit products could get you more points, but, of course, don’t go overboard.

You can order a free copy of your credit report from Equifax Canada or TransUnion Canada.  This has no effect on your credit score.  If you’re a tax or financial advisor, it’s something you’ll want to discuss with your clients, too, because it almost goes without saying that having a good credit history is important to your financial health.

Marcia Elaschuk, DFA-Bookkeeping Services Specialist manages course updating and student support in the DFA-Bookkeeping Services Specialist program.

Sources:  Understanding your Credit Report and Credit Score, Financial Consumer Agency of Canada, March 2016, Data provided by Canada.CreditCards.com by Equifax Canada on Jan. 5, 2016

Additional Education Resources include: DFA-Bookkeeping Services Specialist™ program, EverGreen Explanatory Notes and Knowledge Bureau Calculators.

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