Don't know how your credit score is calculated? That's okay.
There's no need to be ashamed or embarrassed about this.
Did you make some silly mistakes that have caused your credit to be bruised?
Are you still unsure exactly how to repair your credit?
Is your credit in the dumps because of circumstances that are out of your control? Lots of people suffer bruises to their credit after a divorce, for example - but again - it's nothing to be embarrassed about and there's no reason to hide.
Listen.. Our education system doesn't exactly prepare us for things like how to maintain or repair your credit score. Or why a credit score is important at all! They don't teach us about mortgages and interest rates, or saving for a down payment.
In this blog post I will provide an overview of the components of your credit score so that you can start making better choices and working towards repairing your credit, today.
But first:
Who uses credit scores and what does your credit score indicate?
The Who
Any lender that is providing a loan to you, whether it's for a house, a vehicle or some other item, will want to review your credit score.
What does a credit score indicate?
Essentially, it provides information about how likely you are to pay your bills or debts back as agreed.
Alright now down to the nitty gritty..
The 5 Components of your Credit Score
Payment History ~35%
This component provides information on how many credit accounts you have, whether or not you have a history of paying each credit account on time and if not, how overdue your payments are, the amount of your overdue payments and how recently and how often you have missed payments.
This portion weighs heavily at around 35% of your total credit score. It is important that you pay your bills on time and if you've had a poor history of doing so in the past, that you start making at least the minimum payments on your accounts to keep this portion of your credit score satisfactory.
Used credit vs. available credit ~30%
This component looks at how much of your available revolving lines of credit is currently used vs how much is available to you.
For example, if you have $100,000 of credit available to you, and you have used $25,000, then you have a 25% utilization rate.
This portion also weighs heavily on your credit score at about 30%. While using your available credit and making payments is a great way to show good credit habits, you want to keep your utilization rate at or below 30%.
Pro tip: If you are confident that you can refrain from using all your available credit, sometimes it can make sense to request a credit limit increase. This will allow you to utilize your credit line while keeping your utilization rate low.
Credit History ~15%
This component has a smaller impact but is still an important component to your credit score. It looks at how long your credit accounts have been in existence.
In general, the longer your accounts have been open the better. It's also worth noting that opening accounts only to close them shortly thereafter is not a great practice and can have a negative impact on your credit score.
One tip is to have 2 credit accounts open that you actively use and pay off regularly.
Public Records ~10%
This component indicates if you have any debts with a collection agency, whether any creditors have pursued you in court for unpaid debts and if you have experienced bankruptcy or consumer proposal.
Inquiries ~10%
This component provides information about how often an inquiry has been made to view your credit score.
Hard and soft credit checks are shown but only hard checks have an impact on your score. Hard checks happen when you apply for credit whereas soft checks may be performed by an employer and do not directly impact your credit score.
Generally, frequent hard credit checks have a negative impact on your credit score as this can indicate desperation for credit. The impact to your credit score will be greater the worse your credit score is.
In Closing
Everyone's credit situation is unique to them, so there's no one-size fits all recommendation for how you can improve your credit. But understanding the components of your credit score is essential to forming good credit habits.
I hope this has helped provide some clarity around a very obscure but super important personal finance metric.
Best of luck improving your credit score!
P.S.
If poor credit or lack of credit is preventing you from being able to get a mortgage, the good news is that poor credit can be repaired. And you can start building credit today.
Fill in our application form to see how we can help you get on the road to repairing your credit, and take one step closer to homeownership.
P.P.S.
If you don't know your credit score, you can create a free account at www.borrowell.com to access your full credit report in minutes.
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