Credit Score Secrets

by Gail Vaz-Oxlade, for Yahoo! Canada Finance
Thursday, May 27, 2010


Ever wonder how that magical number – The Credit Score – is computed?

Whether you’re obsessing over your FICO score or your Beacon score, you’re likely shopping for credit. The FICO score was developed by Fair Isaac & Co., which began credit scoring in the late 1950s. The point of the score is consolidate your credit profile into a single number. The Beacon score is a brand name used by Equifax, the largest credit-reporting agency in Canada. While Fair, Isaac & Co. and the credit bureaus do not reveal how these scores are computed, whether you get a loan or not is a numbers game: The more points you score on your credit app, the better you do.

There’s a reason you have to fill out so much information when you’re applying for credit. Everything counts. Your age, your address, and even your telephone number all have a role to play in whether or not you’ll get credit.

More from Gail Vaz-Oxlade:

• Gail's four rules for finding financial bliss

• Gail answers your personal finance questions

• Banks crack down on a safety net for your money
See all of Gail's columns on Yahoo! Canada Finance
Young ‘uns and old folk are at a disadvantage since under 21 and over 65 likely means you aren’t working; no points for you. If you're married, you’ll get a point for being “stable.” And while you might think that being divorced would work against you (all that spousal and child support), most creditors don’t give a whit.

No dependents? Zero points. You’re probably still gallivanting like a teenager since you haven’t yet “settled down.” One to three dependents? Score one point. You’re a solid citizen. More than three dependents? Score zero. Have you no self control! And don’t you know you that with all those mouths to feed you could get in debt over your head?

Your home address counts too. Live in a trailer park or with your parents? Bad risk, score zero points. You could skip town with nary a look over your shoulder. Rent an apartment? Give yourself one point. Own a home with a big fat mortgage and you’ll score major points since someone has already done some checking and you qualified for a mortgage. Own your home free and clear? Even better. You’ve proven you can pay off a sizable debt and now you have a pile of equity that the card company would love to help you spend.

Previous Residence? Zero to five years (some applications only go to three years), score zero points since you move around too much. No land-line: zero points. How the Dickens are they gonna find you when you fall behind in payments. Since they can’t use your cell phone to actually locate you physically, it doesn’t count.
Less then one year at your present employer earns you no points. Again, it’s a stability and earning continuity thing. The longer you’re on the job, the more likely you are to be bored out of your mind but you’ll score more points. And, not to overstate the obvious, the more you make the better.

The more willing you are to make your lender rich, the higher your score will be. Since the FICO score was originally designed to measure customer profitability, if you pay off your balance in full every month, you’re going to score lower than the guy who only makes the minimum payment and pays huge amounts of interest.


Scores range from 300 to 900 and if you manage to hit 750 or above you’ll qualify for the best rates and terms. Score 620 or lower and you’ll pay premium interest if you even qualify; 620 is the absolute minimum credit score for insured mortgages.
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Your credit score can change quickly. Payment history accounts for about 35% of your credit score and just one negative report can drop your pristine score into the doldrums. Since scores are updated monthly, your bad behaviour won’t go unpunished for long.

The type of credit you have counts for about 10% of your score. And your current level of indebtedness accounts for about 30% so going too close to your credit limit is another way to deflate your score. One rule of thumb is to keep your balances below the 65% mark. So if you have a limit of $1,000, you won’t ever carry a balance that’s more than $650.

Having too much credit available can also hurt your ability to borrow since the more credit you have, the more trouble you can get yourself into. If you’ve got a walletful of cards, canceling credit you’re not using can be a good thing – for both you and your credit score – over the long haul. Careful though. If the card you’re eliminating is one with a long, positive history, you’ll eliminate what could be a very good record of your repayment when you cancel the card. You’d be better off cutting up the card so you aren’t tempted to use it, while you establish a track record (six months or more) before you actually cancel the account.


Credit shopping can also cost you points. Since about 10% of your credit score relates to the number and frequency of new credit enquiries, applying willy nilly for new credit will end up costing you. However, it’s only when a lender checks your score that this registers on your score. Checking your own credit report/score is considered a “soft” inquiry and does not go against your score.

Credit Score Secrets

How and why you should check it out

CBC News

It's been a bad year for bankruptcies. In August 2009, 9,593 Canadian consumers declared bankruptcy. That's 36 per cent higher than for the same month last year — just before the economy imploded.

Business have fared significantly better. August 2009 saw the fewest number of business insolvencies — 466 — since January 1987.

There's a bit of a silver lining to the dark bankruptcy cloud for consumers. Fewer Canadians threw in the financial towel in August than in the month before — 7.3 per cent fewer. It's a trend that's been developing since early last summer.

If you're emerging from the bankruptcy process, rebuilding your credit rating can take significant time. But keeping on top of your rating is pretty straightforward.

There are plenty of people and companies who suggest they can do the legwork, and then some, for you — for a price. Mostly, the things they say they can do, you can do — for free.

How to check your credit rating — and why everyone should

Everyone who's ever borrowed money to buy a car or a house, or applied for a credit card or any other personal loan has a credit file. Because we love to borrow money, that means almost every adult Canadian has a credit file. More than 21 million of us have credit reports. And most of us have no idea what's in them.

Are there mistakes? Have you been denied credit and don't know why? Is someone trying to steal your identity? A simple check of your credit report will probably answer all those questions. And it's free for the asking.

So what's in a credit report?

A surprising amount of detail, actually. It contains information about every loan you've taken out in the last six years — whether you regularly pay on time, how much you owe, what your credit limit is on each account and a list of authorized credit grantors who have accessed your file.

Each of the accounts includes a notation that includes a letter and a number. The letter "R" refers to a revolving debt while the letter "I" stands for an instalment account. The numbers go from 0 (too new to rate) to 9 (bad debt or placed for collection or bankruptcy). For a revolving account, an R1 rating is the notation to have. That signifies that you pay your bills within 30 days, or "as agreed."

Any company that's thinking of granting you credit or providing you with a service that involves you receiving something before you pay for it (like phone service or a rental apartment) can get a copy of your credit report. Needless to say, they want to see lots of "paid as agreed" notations in your file. And your credit report has a long history. Information remains on file for six years.

What's a credit score? And why is it so important?

Making financial mistakes can lead to black marks your credit rating. (iStock photo)Basically, it's a mathematical formula that translates the data in a credit report into a three-digit number — between 300 and 900 — that lenders use to make credit decisions. It's a snapshot of your credit risk at a particular point in time. The higher your credit score the more likely you are to be approved for loans and receive favorable rates.

A credit score (also called a FICO score) is not part of a regular credit report. You'll have to pay to get that number.

The FICO scoring system was developed by Fair, Isaac and Company, Inc. — the pioneer in credit scoring.

Credit scores between 750 and 799 is shared by 27 per cent of the population. Statistics show that only two per cent of the borrowers in this category will default on a loan or go bankrupt in the next two years. So that means that anyone with this score is very likely to get the loan or mortgage they've applied for.

How can I get a copy of my credit report and credit score?

You can ask for a free copy of your credit report by mail. There are two main credit bureaus in Canada: Equifax Canada and TransUnion Canada.

To order your credit report, you'll need to send in photocopies of two pieces of identification, along with some basic background information. The reports will come back in two to three weeks.

If you can't wait for a free report by mail, you can always get an instant credit report online. TransUnion charges $14.95. Equifax's rate is $15.50.

To get your all-important credit score, you'll have to spend a bit more. Both Equifax and Trans Union offer consumers real-time online access to their credit score (your credit report is also included). Equifax charges $23.95, while TransUnion's fee is $22.90.

What if I find an error in my credit report?

Well, you won't be the first. In millions of files and hundreds of millions of reported entries, there are bound to be mistakes. Some are minor data-entry errors. Others are damaging whoppers. For example, there have been instances where negative credit files from one person got posted to the file of someone who had a similar name (the "close enough" school of credit reporting).

Several years ago, CBC's Marketplace program asked 100 people to look over their credit reports to see if there were any mistakes. More than 40 people spotted errors. And in 13 of the cases, they were serious enough to affect their credit status.

And if you spot entries that don't seem to relate to you (such as charge accounts you never opened or bad debt notations you never got), you may be a victim of identity theft. You should notify the credit reporting company immediately.

What are credit-monitoring services?

There are companies that will take the effort of checking your credit report off your hands - for a price. Usually, a pretty steep price. If you go to TransUnion's website, for instance, the first thing you see is their effort to sell you on their credit monitoring service. It costs $14.95 a month and includes unlimited access to your credit report and credit score.

There are several other companies offering the same service for similar prices. They usually include features like e-mail alerts when there's a change to your credit report.

It's a personal decision whether the service is worth the money. The bottom line is you can always check your credit report for free by mail. Or, you could pay to get it online whenever you want. But for people who have been the victims of identity theft or people worried that they may be susceptible to ID theft, the expense may be worth it to ease the anxiety.

Should I pay to use a credit repair service?

Industry Canada recommends you save your money and do the legwork yourself. It notes that there's nothing a credit-repair company can do that you can't do yourself. Anything you do won't cost you a cent.

There are many companies that sell "credit repair" services. If you decide to hire one, you should stay away from those that:

• Claim to have an "in" with credit reporting agencies. They have as much of an "in" as you do.
• Claim they can clean your credit quickly or get you a new, clean credit file. Building credit takes time. So does restoring a good credit rating.
• Suggest you call their 900-number for details on how to fix your credit report. You'll be paying by the minute for information that you can get for yourself and that likely won't help you at all.

Some of these companies will offer credit-monitoring services that alert you if something suspicious appears on your credit report. That will cost you hundreds of dollars a year. Other services for sale include registering all your credit, debit and ATM cards. You call the service if your card is lost or stolen and the company notifies your financial institution. Again, this is something you can do at no expense to you.

If you notice an error in your credit report, contact the credit-reporting agency and tell them. You'll have to fill out a form and any documents that support your claim.

If the file is changed, you will be sent a copy of your new report and any company that's requested your credit file in the previous two months will also be sent the corrected file.

If the item is not changed to your satisfaction, you have the right to add a brief statement to your credit file with your side of the story. You can also ask to have your credit file, along with your comment on the disputed entry, sent to any company that has requested your credit report in the previous two months.

There's no way a credit repair clinic can change accurate information that doesn't reflect well on you. A statement from Equifax puts it bluntly: "Only responsible credit practices over time can improve a poor credit history."

Your Credit Score

Below is a chart to show you the factors that make up a credit score, the classification of each and some HOT TIP!s on keeping a good score or improving a low one. This is great information to enhance your credit report or share with family member or friend.

These percentages are based on the importance of the 5 categories for the general population. For particular groups - for example, people who have not been using credit long - the importance of these categories may be somewhat different.

Payment History
· Account payment information on specific types of accounts (credit cards, retail accounts, installment loans, finance company accounts, mortgage, etc.)
· Presence of adverse public records (bankruptcy, judgments, suits, liens, wage attachments, etc.), collection items, and/or delinquency (past due items)
· Severity of delinquency (how long past due)
· Amount past due on delinquent accounts or collection items
· Time since (recency of) past due items (delinquency), adverse public records (if any), or collection items (if any)
· Number of past due items on file
· Number of accounts paid as agreed
Amounts Owed
· Amount owing on accounts
· Amount owing on specific types of accounts
· Lack of a specific type of balance, in some cases
· Number of accounts with balances
· Proportion of credit lines used (proportion of balances to total credit limits on certain types of revolving accounts)
· Proportion of installment loan amounts still owing (proportion of balance to original loan amount on certain types of installment loans)
Length of Credit History
· Time since accounts opened
· Time since accounts opened, by specific type of account
· Time since account activity
New Credit
· Number of recently opened accounts, and proportion of accounts that are recently opened, by type of account
· Number of recent credit inquiries
· Time since recent account opening(s), by type of account
· Time since credit inquiry(s)
· Re-establishment of positive credit history following past payment problems
Types of Credit Used
· Number of (presence, prevalence, and recent information on) various types of accounts (credit cards, retail accounts, installment loans, mortgage, consumer finance accounts, etc.)
Please note that:
· A credit score takes into consideration all these categories of information, not just one or two.
No one piece of information or factor alone will determine your score.
· The importance of any factor depends on the overall information in your credit report.
For some people, a given factor may be more important than for someone else with a different credit history. In addition, as the information in your credit report changes, so does the importance of any factor in determining your credit score. Thus, it's impossible to say exactly how important any single factor is in determining your score - even the levels of importance shown here are for the general population, and will be different for different credit profiles. What's important is the mix of information, which varies from person to person, and for any one person over time.
· Your credit score only looks at information in your credit report.
However, lenders look at many things when making a credit decision including your income, how long you have worked at your present job and the kind of credit you are requesting.
· Your score considers both positive and negative information in your credit report.
Late payments will lower your score, but establishing or re-establishing a good track record of making payments on time will raise your credit credit score.

Here are just a few quick tips that can help put you in a better position under the discerning eye of an underwriter!
· HOT TIP! Do you have past due balances that have been neglected? If they are showing up on your credit report and you want to purchase a home, make sure you bring them up to current status whenever possible.

· HOT TIP! Do you have outstanding debt that you can afford to pay off right now? Try to get these accounts down to a zero balance, or at least a lower balance. If your cash on hand doesn’t allow you to do this, try to distribute the debt amongst other open credit cards. You can also consider opening a new line of credit and transferring part of the balance off a card that is close to being “maxed out.” If you can get the resulting balances below 50% of the available credit, you’re on the road to improving your credit score considerably in most cases.
· HOT TIP! Do not close existing credit card accounts, even if you don’t want to deal with the company any more… Believe it or not, the credit history is a good thing to have!

· HOT TIP! See if your credit provider will increase your available lines of credit. This can, in turn, reduce the overall debt ratio, but only do this if your credit card company can do that without a hard credit inquiry.

HOT TIP! Do you have past dues and charge-offs within the last two years? Pay them off now, if you can! Past dues older than two years will have little to no impact on your credit score if they are paid, but can possibly bring the score down, which is something we don’t want to do… Focus on the 2 year time frame.

HOT TIP! Do you see errors in your report? Request the credit bureau delete any outstanding debt that is incorrectly charged to you, or things that should have been removed that you have already paid. They have an obligation to reconcile this within 30 days. If you see items on your report that are less than two years old and you have the money to pay it off now, mark the back of your payment cheque with the following notation "Accepting this cheque is evidence that the transaction is complete and this charge will be deleted from my credit record". If necessary you can use this cancelled cheque as proof of the transaction in the event the outstanding debt is not removed promptly and interfers with the closing of your loan.

Your Credit Score