What is a Credit Score ?

23 November 2020 by National Bank
credit score

A credit score is an assessment of your credit history and your ability to manage the credit assigned to you. It’s the result of a mathematical formula used to quantify your risk level. Your score is obtained after a detailed analysis of your credit report, your credit history (type and duration of loans, payment due date compliance, etc.), and your personal information. 

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Assessing an individual’s credit score

A credit score is typically attributed by a credit reporting agency, otherwise known as a credit bureau. These companies collect data to assess the likelihood that an individual will be able to meet their financial commitments.

Your credit score changes over time depending on your financial behaviour. For example, your credit score could drop if payments are made late, or if credit cards and loans are nearing their limits. Conversely, making all debt payments on time can help improve your credit score. 

Credit scores typically range from 300 to 900. A good credit score is 670 or higher. A score of 800 or more is excellent, indicating that the risk of not honouring payments is low. Your score is one of the indicators used by lenders to determine whether a request for credit (such as a credit card or line of credit) will be accepted along with the accompanying conditions, if required.

Different factors can influence your credit score, for example, in order of importance:

  • Your payment habits (35%)
    The more often you make payments on time and the more often you make payments in general, the better your score will be. Late payments and defaults will lower your score. 
  • Your use of available credit (30%)
    Approaching your credit limit can negatively impact your score.
  • The date your account was opened (15%)
    The age of your account can have a positive impact on your rating. An account that has been open for a long time allows lenders to learn about your repayment habits. Paying accounts on time over a long period of time is a sign of good credit management.
  •  Amount and types of debt (10%)
    Having a variety of accounts can positively impact your score, like if you hold these three kinds of accounts: a mortgage, a credit card, and a line of credit. However, having many accounts of the same type can be to your disadvantage: many accounts of the same type give you access to more credit, so you’re at greater risk of running into problems with debt.
  • The amount of new credit applications you make (10%)
    The more applications you make, the more your rating suffers.

What is a credit score for?

Lenders use credit ratings to assess a customer’s risk level. Telecommunication companies, insurers, building owners/landlords and government agencies also use credit scores to assess risk level. 

Some debunked myths about credit score

1. My credit score will be penalized  if I check my credit report

Not at all! On the contrary, to get your financial situation under control and to spot fraud, you should check your credit report regularly.

2. It is impossible to oppose the assessment sent by creditors to credit agencies

You have the right to report any inaccuracies that appear in your report to credit agencies.

3. Changing my spending habits won’t change my personal credit rating

Your credit score comprises your credit card balances and other loans, so reducing your balance is helpful. Cutting back on spending and getting into less debt can positively affect your credit score.

4. My business debts won’t affect my personal credit score

Even if your accounts are separate, lenders will often ask you for a personal guarantee for money loaned to your business. If your business is in trouble, your personal report might be affected.

5. Responsible use of my debit card will improve my credit score

A debit card is not a credit card as there is no concept of credit. Using debit, you are simply spending the cash you already have on hand.

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To verify your credit rating

In Canada, as a consumer, you can get a free copy of your credit report a certain amount of times per year by requesting a copy in writing. These requests are registered with credit agencies but have no impact on your credit score. 

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