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Credit Rating 101

How does it impact my ability to buy a home?

The Canadian Credit Bureaus are similar to the Knights Templar. We know they exist, but nobody has ever seen them and we don’t really understand what they do.

A Credit Company maintains information about consumer credit reports. These reports are sold to businesses, such as low mortgage rate lenders, insurance firms, banks, and retailers, so they can access the credit worthiness and payment history of the customer. This history provides an indication of how the customer has honoured financial obligations in the past. Businesses then use this information to decide what sort of products or services to offer the customer, and on what terms.

How is a Credit Score Calculated?

Trying to understand your credit score and how it’s calculated is like trying to crack a complicated algorithm.

A credit score is a statistical formula that translates personal information from your credit report and other sources into a three-digit number. Most Canadian credit bureaus use the method first introduced by a company called Fair, Isaac and Co, and known as the FICO score. It’s a number between 300 and 900 that lenders use to determine your credit risk. The higher your credit score the more likely you are to be approved for loans and receive the best low mortgage rate.

What is a good credit score? A good credit score is 760 or higher. Keep your score above this rate and you’ll have no problem getting quoted a competitive Canadian mortgage rate for your home, credit card or loan.

Your FICO Score

Your FICO score measures the following categories (in order of importance):

  1. Payment History – any and all instances of unpaid loans, your payment history, how many past due items are on your file
  2. Amounts Owed – your total outstanding debt and type of debt, number of accounts with balances, proportion of balances to total credit limits
  3. Length of Credit History – time since accounts opened and time since account activity
  4. New Credit – number of recent credit inquiries and openings, time since credit inquiries made
  5. Types of Credit Used – presence and prevalence of various types of accounts (credit cards, retail accounts, line of credit, mortgage, car loan, etc.)