How Credit Works and the Easiest ways to Increase Your Credit Score
Because credit can affect many areas of our lives, especially when a loan or mortgage is needed, it is important to understand how the system works, and what kinds of things can affect your score. Indeed, for many, the credit system is somewhat of a mystery. Weather you are wondering about how the system works, or if you are looking for the easiest ways to improve your score, this article will help you.
The following criteria lays out how the Beacon Score, or credit score is calculated. For each criteria, we look at how to increase your score. Remember, the following advice speaks of a perfect situation. Although perhaps not immediately attainable for many, the closer you can get to these ideal situations, the better your credit score will be.
1. Payment History – 35% of Score Calculation: Factors in the number of debt payments over 30 days late, collections and any other matters resulting from late payments. A single payment currently showing over 30 days late removes 20 credit points instantly. Credit will begin to repair after only two months of on time payments, so use this rather short repair period for motivation to pay consistently.
2. Current Debts - 30% of Calculation: Looks at how much debt you have relative to your credit and debt limits. For example, a total credit limit of $10,000 which has $8,000 outstanding totals 80% of credit used. Any number above 50% of credit used will begin to diminish a credit score. If 50% can not be attained, a good goal is 70%. Your variety of debt will also affect your credit. Try to keep two credit cards and hold onebank loan to maximize your score in this area. A loan can be as simple as an RRSP loan which will build your credit, be invested to make interest for you, can be paid back quickly, and mainly, can give you a nice tax refund at the end of the year! Finally, be sure to NEVER go above your credit limit.
3. Account Age – 15% of Calculation: How long you have held a bank account with your financial institution affects your score slightly. The optimal number of accounts held is three and the longer they have been open the better.
4. Types of Credit – 10% of Calculation: Similar to two. Focuses on the mix of debt you have (credit cards, bank loans, lines of credit). The optimal mix is one store credit card (ex. the bay, Best Buy…), one or maximum two bank credit cards, and one installment bank loan. Make sure to use your credit cards as well - even if just for gas, and to re-pay the balance every month. Again, this is an optimal position and any reasonably similar situation will not lower your credit much.
5. Number of Credit Inquiries – 10% of Calculation: Over the past 12 months, how many times has your credit score been looked at? Having too many credit or loan applications could deem you a ‘credit seeker’, so try to keep the number less than 5 per year.
Finally, have your credit bureau checked for mistakes. I have seen many individuals with mistakes on their credit score that resulted in higher interest payments. Check with Equifax regularly to ensure your credit score is accurate.
Reasonable variation from this perfect situation will still give you a great credit score and obviously, the closer to it, the better it will be. Contact myself for further information on increasing your credit rating and save thousands of dollars on interest as a result.
I am always happy to help.
www.brentrichardson.ca - brent@brentrichardson.ca
Brent Richardson
Have a question or comment? Feel free to make a post.
