Your credit score is a rating, expressed as a number and often accompanied with a description of what that number means (such as “Good”). It is a representation to potential lenders of how credit worthy you are.
Lenders use this rating to decide whether or not to provide you with credit, and if so, how much and at what interest rate:
If your credit score is too low, you won’t get approved at all.
If your scored is adequate, but not terrific, you may get a lower spending limit plus a higher interest rate. You’ll pay a higher interest rate because the lender views you as a higher risk. They want to be paid more for taking on that risk.
If your score is really good, you’ll get the loan and can negotiate a favourable interest rate.
It’s in your best interest to keep your credit score as high as possible. The money you’ll save in interest on large loans like a mortgage will be significant.
Each credit agency uses their own mathematical formula to come up with your score. The variables used by each, and the emphasis on a particular factor will differ between agencies but the 5 main elements that influence your credit score are:
Your payment history — Do you pay on time?
Total amount of debt you carry — Are you maxed out or close to it?
Length of your credit history — Longer = better.
Types of credit — If you have a variety (mortgage, car loan, credit cards) it’s viewed favourably.
New credit — If you’ve opened a lot of new credit accounts recently, lenders will be more cautious, because it looks like you’re scrambling to borrow money.
Of these 5 common factors used to determine your score, payment history is the most important followed by your overall debt load. Manage these two aspects of your credit well and your score should at least be reasonable.
See this post for ways to build up your credit history and tips for improving your credit score.
