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What’s In A Credit Score?

May 6, 2015

When it comes to your financial health, there are lots of numbers you could examine. Your bank balance, the amount of debt you owe and your net worth are just some examples. But of all these numbers, credit score has to be the one that Canadians understand the least. What goes into a credit score? What’s the difference between a credit score and credit report? Who compiles them? Read on to find out more.

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Who Provides Credit Scores?
There are 2 credit bureaus in Canada – Equifax and TransUnion – that compile and report a consumer’s credit history. They build a credit file on consumers as the consumer applies, gets and uses credit. The credit bureaus maintain the information in a credit report that is used to assess a consumer’s ability to repay loans.

What Is A Credit Report?
The credit report is a factual history of the consumer’s credit history. It includes name, address, employment information, credit requests and actual credit that the consumer holds. It is important to monitor your credit report to make sure the information is correct.

What Is A Credit Score?
The credit score is a quantitative depiction of the consumer credit file. It is a numerical score based on the consumer’s perceived ability to repay loans. There are several sources of credit scores, and both credit bureaus have their own. FICO is the company where the original credit score came from and both credit bureaus also use the FICO score, although it is custom built for each credit bureau. Scores range from 350 to 850 or 900 depending on which company provides it. The consumers with the highest scores are considered the most credit worthy consumers and can negotiate the lowest rates.

What Makes Up A Credit Score?
Each company uses its own proprietary models to build a credit score but FICO in the US actually spells out how they calculate the score. Looking at the FICO website, there are 5 main things that make up a credit score:

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  • Payment History – the largest driver of a credit score is how the consumer has repaid loans in the past. 35% of the score is made up of the repayment ability of the customer.
  • Amounts Owed – this makes up 30% of the credit score. This can impact at both end of the spectrum. Too much owed reduces the score and too little owed also reduces the score! You may ask why too little owed would reduce the score; it may be that there hasn’t been enough activity to properly evaluate repayment ability.
  • Length of Credit History – nothing a consumer can do about this except get and keep credit and repay credit. The longer the credit history, the better the score. This makes up 15% of the credit score.
  • Types of Credit Used – the score also looks at the types of credit: revolving (e.g. credit cards and lines of credit), instalment (like a car loan that has a fixed term), mortgage. The more diverse the credit used and repaid, the better the score. This is worth 10% of the credit score.
  • New Credit – worth 10% of the credit score. Applying for and getting credit is positive. Applying and/or getting credit several times in a short period of time is not positive. This is seen as a customer actively seeking and requiring immediate credit.

The five points above are available at the FICO website but all scores are calculated differently and are proprietary. While the principles and attributes may be the same, the weightings may not be and a consumer credit score will be different depending on which company calculated it.

While the five points above go into the calculation of a credit score, the following will never be factors in the calculation of a credit score:

  • Geography – where you live
  • Age
  • Occupation
  • Sex
  • Marital Status

Did you learn anything new? Anything surprise you about credit scores? Leave a comment below.

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Scott is Chief Risk Officer at Borrowell. He prefers numbers to words, golf to numbers, and low numbers in golf. 

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