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.
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:
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.
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.
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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