What is Your Credit Score and How Does it Get Calculated
We know that when it comes to understanding your credit score, it can feel a lot like trying to decipher grade 10 algebra (fifteen years later, and we still don’t see the need for it). When you’ve spent the last decade googling how to do percentages (thank you, technology), calculating and deciphering your credit score might just be the last thing on your priority list.
Poor credit is a roadblock in the most literal sense. It can prevent you from getting future apartments, signing up for new contracts, or even landing your dream job. But understanding your credit, knowing your credit score, and knowing how they impact your finances can help you learn more about just exactly what’s at stake.
Credit Report Vs. Credit Score
First things first: know the difference between your credit report and your credit score.
Your credit report is the collective summary of your credit history. It’s a ledger of all the times you borrowed money, such as a student loan or through a credit card. It’s also where personal information, such as your SIN number and any missed payments, goes and is accessed by banks, credit card companies, auto leasing companies, and credit reporting agencies.
When you apply to borrow money from any financial institution, your report is checked to see if you’re financially capable of handling the debt based on your history of money, payments, and score.
Speaking of: your credit score is derived from your credit report. It determines who is who in credit standing, which, unfortunately, can be an unfair way of determining whether you get approved or not (often, creditors will look at your score, rather than your report). They’re points that are based on the financial actions you’ve made, and ranges from 300 (lowest) to 900 (highest). The best way to maintain a high score is by making payments on time for your debt.
If you want an exact breakdown of your credit report, it might be worth your time and a small fee to order your report (you’re entitled to a free report, not a free score).
Here is how your credit is determined by the big guys.
Length of Credit
How long have you had a loan or credit card? If you just got one last year, it could factor into your credit score. We know: how does that make sense? No credit = bad credit? But even if you’ve been being a boss about managing it, it can also mean your score will be on the lower side. On that note, if you also have no credit history, you’ll find creditors more unwilling to grant you a loan, since they aren’t able to determine whether or not you are reliable (even though your mom thinks you’re a totally stand-up person).
Your Payment History
Creditors want to know that you’ll be paying them back. And if your payment history reflects that you haven’t always paid on time, or, worse case scenario, that your account went to collections, then you’re looking at having a noticeable ding in your credit score. Your history makes up a whopping 35% of your score, meaning it’s never been more important to always be on time with payments. This is when it comes in handy if you listened to your mom when she told you to always be on time.
How Much You Owe
Prior to applying for a credit card, a creditor will look at how much debt you owe. This makes up for 30% of your credit score. Before the loan you any money, they want to see just how much you already owe, and if it’s a significant portion, they might not be convinced you’ll be able to pay them back in the future.
New Credit Card Applications
Typically, having multiple accounts is a good thing. Creditors like seeing that you have a diverse amount of debt; but they also like to see that you’re paying it off. If they think that you’re shopping around for more ways to manage your finances, they might be less inclined to provide you with another card. If you’re already struggling with trying to manage multiple accounts, it will negatively impact your credit score.
The types of credit that you have is also another factor that goes into determining your score. Think of your credit history as your resume: the more diverse, the better! Credit cards, lines of credit, a car loan – these are all beneficial to your name and demonstrate that you are able to manage your accounts across multiple channels. Consequently, if you’re struggling, it’s going to negatively impact your score.
Knowing where you stand and how your credit is calculated helps to set you up for success in the future. If you don’t know the ins and outs of your report, you can always order yours from Equifax and TransUnion.
You can also easily calculate your credit score here and fill in the fields to get an estimate as to where you might stand.
Both are a good starting point for improving your finances and knowing just what goes into the process of approving you for your auto financing.