How do Credit Bureaus calculate your Credit Score?​

Your purchasing behavior is very much dictated by your creditworthiness. Keeping a good credit score gives you the bargaining power to request better credit cards or loan deals. You may be able to negotiate lower interest rates. Also, increase your chances of being approved for new credits and increase your borrowing capacity.   

Multiple factors come in the way of your credit score calculation. It usually depends on the algorithm used by the credit bureau to prepare your credit report and may also be subject to the lender’s industry-specific requests. For instance, your credit score may not be the same one for a mortgage request and an auto loan. The score may vary, but slightly. As a matter of fact, the major components weighing the most on the score’s result are not much different from one agency to another or from one lender to another.  

Circa 660 and above is good for a credit score

Your credit report contains information that represents a grade point average that shows how your creditors perceive you. To put it in another way, your credit score determines your creditworthiness. According to Canadian standards, the credit score ranges between 300 to 900. In general, a score around 660 and above is good, around 760 and above is excellent. In addition to your credit score, lenders rely on your income to decide on your eligibility to apply for a credit.  

What’s in your credit score?

The score represented in your credit report represents your credit activity. It is how your creditors evaluate your creditworthiness based on the following five factors: payment history, credit utilization, credit history, credit mix, and credit inquiries.   

Payment history largely impacts the credit score

Payment history weighs heavily on the calculation process. It shows how you have managed your credits in the past and constitutes most of the time around 35 percent of the total score. It shows credit card payment history, auto loans, student loans, personal loans, and mortgages. Besides, how much you score on this component is highly affected by any past bankruptcy, foreclosure, or accounts turned over to collection agencies. Late payments and missed payments will affect your score. For this reason, it is recommended to stay aligned with your creditor about any potential late payment. Knowing that it is always possible to make up for a late payment because the reporting date is at least 30 days after the payment due date.  

The thirty percent credit utilization limit

The credit utilization ratio is how much credit you are using vis-a-vis your authorized amount. Ideally, you should keep your credit utilization under 30 percent, and if you ever exceed this ratio pay it off as soon as you can. This means that, if you have a $5,000 available balance in credit, do your best not to go over $1,500 to keep your score intact.  

The length of your credit history has a medium impact

This metric shows how long you’ve had credit. Usually, creditors are concerned about new credit accounts and prefer longer ones. The longer the credit account the better the financial institution will be able to determine your risk level. 

Significant factors with low impact

If you can successfully manage different types of credit I.e., car loans, and credit card, you score better on the credit mix metric. However, applying to multiple credits at the same time requires lenders and creditors to inquire about your credit score. A large number of inquiries can negatively impact your score. You may be perceived as a bigger risk if you have multiple credit applications. This type of inquiry is called ‘hard inquiry’.  

Soft inquiries are FREE at Dwello

‘Soft inquiries’ are when you check your credit score regularly and this does not affect your score at all. On the contrary, you are always highly recommended to make soft checks on your credit score to ensure the accuracy of your information and avoid having any wrong or missing information impact your score in a negative way.   

Reach out and we will let you know to learn more about credit score building.