Understanding Credit

Background

Your credit score is created using a mathematical formula that measures data from your credit profile. Credit scores evaluate your payment behaviour, debt levels and credit history. Factors like income, race and gender are not measured in the scoring process. Lenders, insurers, landlords, employers, utility companies and even judges evaluate your credit behaviour using the credit scoring system. Having a high credit score will help you receive the best rates on new credit and loans. Scores typically are from 400 through 900 - but in all our experiences we have not seen a score higher than 850.

Summary

Example purposes only: Using a Credit Score of 600

This credit score is satisfactory. This person may be able to qualify for new credit and loans but will probably not receive the best rates. They might have to pay a deposit or down payment to receive a credit card or loan. Lenders will use your credit score along with income, employment and debt information to determine your interest rates. This client will probably be able to improve their credit score within a year by reducing their debts, maintaining record accuracy and paying their bills on time. Obviously, the higher the score the more desirable you are in the eyes of the lender. Typically anyone showing a score of 700+ are VERY desirable.

Explanation

There are several factors taken into account that help determine your credit score. The factors making the largest impact are listed below. Remember that these factors vary in how strongly they impact your credit score. For example, if you have a very high credit score, the negative factors in your analysis are likely to have a small impact. For very low credit scores, the opposite is true in that negative factors have a very large impact on your credit.

Here are the top factors that make your score lower:

There are too many consumer finance company accounts on your credit report. Having too much available credit can sometimes harm your credit score. Lenders may feel that you have the ability to spend more than you could potentially pay back. You might want to consider closing a few accounts or asking to have your credit limits reduced. Avoid closing too many accounts - especially the oldest accounts on your credit profile - because it could harm your credit score.

Your account balances are too high. High levels of debt can signal to potential lenders that you are spending more than you can afford. It is a good idea to use your credit cards regularly but remember to keep your balances below 75 percent of your available credit limits. If you have balances above 75-90 percent, you could see your credit score start to drop significantly.

There is not enough recent revolving account information on your credit report. Using your credit accounts regularly is an important part of building healthy credit. Lenders will be able to better evaluate your creditworthiness if there is more data about your payment and spending behaviour on your credit report. Using a credit card to make a few purchases each month may help improve your credit score.

Your loan balances are too high in comparison with your loan amounts. High levels of debt can signal to potential lenders that you are spending more than you can afford. It is a good idea to use your credit cards regularly but remember to keep your balances below 75 percent of your available credit limits. If you have balances above 75-80 percent, you could see your credit score start to drop significantly.