Understanding your Credit Score

Credit scores aren't generally something we really and truly think about until we're applying for a mortgage. Sure we all know that it bodes best for us if we make our payments on time and don't carry a balance on our credit cards, but after that how many of you know what you can do specifically to improve your credit score? I'm going to break it down for you into several different blog posts as I'm sure you'll find this to be captivating information!

Part 1:

What is the purpose of a credit report and what type of information can you expect to see on the report?

As per the www.equifax.ca Canadian credit website, you can expect to find the below information on your report:

• Personal Identification - Includes key identification information, such as your name, address, date of birth and Social Insurance Number (SIN)
• Consumer Statement - Allows you, the consumer, to add a brief comment about any information in your report
• Credit Information - Provides details of your credit accounts and transactions and shows if payments are being made on time
• Banking Information - Includes information on your bank account and NSF cheque history
• Public Record Information - Contains information about secured loans, bankruptcies and/or judgments
• Third-Party Collections - Contains information about any involvement with a collection agency trying to collect on a debt
• Inquiries - Includes all organizations or individuals that have requested a copy of your credit report in the past three years

*Note re: the above bullet on inquiries. Unless you really, really, really require that 'free baseball hat' or 'free t-shirt' that they are promising you at the Flames game when you sign up for a Mastercard, do not go through with this. This will be a "hard hit inquiry" on your credit bureau and will lower your credit score needlessly!

The credit report exists to provide lenders a glimpse of your financial history at any given point in time. When you being to establish credit or receive a loan from a bank, all of this information is documented on your credit report. If you were to miss a payment or go into collection over an unpaid bill - this too is documented on your credit report.

All of this information produces a FICO or Beacon score, which ranges from 300-900 and is known as a credit risk scoring system. Someone with a credit score of 720 is much more likely to pay their monthly mortgage payments each month and on time than someone who has a 545 and has in the past gone to collections for unpaid bills.

The credit report also highlights all active and inactive trade lines, providing the lender with a snapshot of your financial history as well as your willingness to repay the debt. It is most beneficial to have no more than 5 trade lines at a time. If you have numerous credit cards with a balance of zero, simply because you qualified for them but do not utilize them, why not cancel them and clean up your bureau?

Next post in the credit series will explain how the credit score relates to your ability to 'qualify' for a mortgage. Keep reading for more exciting information!