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9 Mar

How credit score works


Posted by: Aneta Zimnicki

Many people wonder what factors contribute to the credit score. The score is the result of a complex formula that follows these general guidelines:

35% Payment History
30% Outstanding Balance
15% Credit History
10% Types of Credit
10% Inquiries

Some tips:
Spread credit card balances over multiple cards to stay below 50% of limit. When you are close to limit, it is interpreted as ‘maxing out’.

Total Debt Service Ratio for mortgage qualification calculations uses actual balance on credit cards, not the allowable limits.

Limit the number for credit inquiries per year. When you apply for a credit card (including those store credit cards!), loans, lines of credit, a credit check is done, you may not even know it. More inquiries are interpreted as you shopping around for loans and getting declined.

If you have good credit and accidentally forget payment once, it is not the end of the world, there is a time cushion before it gets reported, but you can’t make a habit of it. Missed payments are a big part of the score. Pay at least the minimum amount.

If you are repairing your credit after bankruptcy or consumer proposal, there is no room for mistakes, pay on time.

Pay credit cards weekly rather than monthly to increase score.

It is recommended that you review your own credit report for mistakes and errors. The credit bureau gives you an opportunity to correct these errors. You can get your report instantly online (about $25) or you can mail in a request for free report. Checking your own credit does not impact your score. There are two bureaus in Canada, Equifax is the most widely used.