All of us need to borrow money at some point of time in life and it sure is more than a plastic card. It can be in terms of mortgage, financing or leasing a car, getting loan to renovate house or may be loan for studies. But how can any bank or financial institution or any person can trust us that if they lend us money today, will we be able to pay it as agreed? Every person has unique spending and saving habits. Solution is that they pull your credit history and credit score maintained by credit bureau. Now a days even insurance companies and landlords do a credit check to determine discounts and to determine whether they want to rent you their house or apartment. Employers do a credit check before offering you job letter

What is a Credit Bureau

It is an agency or company that collects and compiles data of your past and present financial history like What kind of bank accounts you have/had (chequing account, savings account, line of credit, personal loan, secured loan), type of account (revolving, joint, personal, business), duration of these accounts, outstanding balance on these accounts, Institution’s name you bank with, how many credit cards you have, what are the credit limits available to you on these credit cards, outstanding balance on credit cards, how many times you were late paying the balance, phone companies you have/had account with, your student loan details, details of your car financing or leasing, mortgage accounts, which companies have pulled your credit history recently and other info as well which is pertinent for lender to decide whether they want to give you loan or not

There are 3 credit bureaus in Canada

Equifax (provides FICO or Beacon Score)

Trans Union

Northern Credit Bureau / Experian

What is a Credit Score

Credit bureaus have developed a number system that rates your credit worthiness. It can range anywhere from 200 to 900. Credit score is a number assigned to you from this range. It is calculated using a very complex and secretly kept formulae based on information of your past credit handling experience and present situation of finances. Higher credit score translates that you are considered as a safer risk or borrower for lenders and you are awarded by better rates of interest charged, lower fees and favorable terms and conditions of lending. With a low credit score your credibility factor becomes risky

Credit Scores are roughly based on following factors

Payment History: 35%: Most important thing that a lender usually examines is whether you have any unpaid credit accounts in the past. Whether you have any payments over 30 days late and how many times, whether you have any bankruptcies, judgments or collections against you. A single 30 day late payment can drop your score by 15-20 points

Current Debts: 30%: Next major thing is how much you owe on an average. This criterion is to calculate your affordability level. Score depends upon how many and how much you owe to creditors if you max out on available credit. Also gives them comparison of how much you owe to how much is your income

Age of Accounts: 15%: Your score will be better if you have good long credit history or you have older accounts. This criterion shows your commitment and history of financial well being.

Type of Credit: 10%: Each Type of credit available impacts you differently. Bank loans, secured or un-secured lines of credit, credit cards, mortgage, revolving credits, car financing, installment loans, student loans or retail store accounts all measure up differently in calculating credit score

Credit Enquiries: 10%: Lenders do not like to see multiple credit applications in past 12 months. If you have many applications in past 12 months it passes them a red flag that you are actively looking for credit and there might be something wrong in your financial situation

Your credit score reflects your financial status and your credibility for future financial privileges. You need to be very careful about your credit score as it is the most important financial document. Moral of the story, know your credit score and manage it diligently