While you may already know what a credit score is, and what it means to your overall success at obtaining future credit, what you may not know are the ins and outs of what exactly goes into the makings of a credit score. How your credit score is calculated is an extremely important piece of information to be aware of as it can allow you to work at building the strongest personal credit rating you can
If, for example, you are in the market to buy a new car and you know vehicle financing will be a necessity, then taking steps to improve your credit as you begin this process can be a highly beneficial course of action. When it comes time for vehicle financing, even if your credit score is not at the ideal level to obtain a loan from a traditional lender, the good news is that Canada Drives is here to guide you through this process and help you obtain this loan.
With that being said, we also want to let you in on some important details about how your credit score will be determined, and what can increase or decrease your potential for obtaining future financing.
Trying to figure out what these credit score numbers are all about? With credit scores ranging from 300 to 850, or even in some cases 900, there are various reasons that will lead to any given score falling anywhere within this spectrum. For example, a strong credit score will be anywhere from 750 and up – and indicate that as a borrower you are the safest risk. Furthermore, a score of 680-749 will mean you are an average risk for lending money to, and a score of 520 or below a lender will see you as a high risk.
These categories, of course, refer to the probability that you will be able to pay back the lender, and individuals with ‘good’ or ‘bad’ credit scores will be offered loan opportunities in varying degrees based on their credit score. So how do they actually arrive at these numbers? Ranked according to credit score significance, here are several factors that impact your credit score and how.
Your Payment History: 35%
Making up 35% of your credit score is your payment history – the largest part of your credit score. Since creditors want to know whether you will be able to pay them back, this is why your payment history is so important. In this situation, they will look at your previous payment behaviour as it relates to all of your various ongoing debt and credit payments.
If you have been able to keep on top of making the agreed upon payments for these loans and bills, then your payment history should help position your credit score in a higher range. If, on the other hand, you have a history of missing payments, then this will negatively impact your score in a significant manner.
How Much you Owe: 30%
Second on the list of most important credit score features, is how much debt you already owe prior to applying for more credit. If a creditor sees that you have a lot of debt, then this may not convince them that you will be able to pay back any future credit they may lend to you.
Secondly, if you have a lot of debt in relation to the amount of available credit you currently have, then your credit score may fall into a lower category. For example, if you typically use 75% or more of your credit limit on one or more of your credit cards, or your line of credit, this will also have a negative effect on your credit score.
The Length of your Credit History: 15%
Another reason for having a low credit score can relate to the fact that you don’t have a long credit history. Even if you have managed your credit effectively from day one, if you have a shorter credit history this can also mean your credit score can be lower.
This is then also why individuals with zero credit histories can also find it challenging to obtain a loan. Due to the lack of credit history, this can lead to a lower credit rating as they have not had enough time to demonstrate whether or not they are reliable borrowers. As such, creditors may also be unwilling to grant them a loan.
New Credit Card Applications: 10%
While it is reasonable for a creditor or lender to be cautious of the frequency at which someone is applying for additional credit, there can also be instances when taking on new credit card applications can actually be beneficial. The downside, however, for potential borrowers, can occur if they are constantly shopping around for credit.
In this case, it can be an indication that they are struggling to pay back their debts and are requiring additional debt to make more purchases – purchases that they perhaps won’t be able to pay back. As a result, this will not reflect well on a credit score and while applying for new credit at reasonable times can increase your score, applying too often can do quite the opposite.
Types of Credit: 10%
By maintaining a diverse range of credit types – credit cards, lines of credit, a car loan, a mortgage – this can be an excellent way to demonstrate your ability to manage your debts as a whole. That being said, if you are able to handle these loans in an effective manner, this will impact your credit score more positively. If, however, you are struggling to do so, then a lower score might be a more realistic outcome for you.
While there are some additional factors that also go into calculating your credit score, the above-mentioned scenarios are the most influential. It is also important to explain that each of the two main Canadian credit bureaus – Equifax and TransUnion – calculate credit scores in a slightly different manner. Therefore, it will be up to each individual lender to determine how they will go about interpreting the credit details, and ultimately the credit score.
All in all, however, if you are aware of the specific credit situations and percentages – as well as how each of these factors will impact your credit score – you can set yourself up for a more successful approach to managing all of your future credit.
At Canada Drives we can support you as you look to make purchasing a new vehicle an achievable goal. Through our straight-forward online loan application process, you can seek out suitable financing for your unique needs. Our team at Canada Drives is excited to help you access your car loan, as soon as you are ready – and in the meantime we can advise you as you begin re-establishing a stronger and healthier credit score.