Friday, October 05, 2007

Understanding Your Credit Report and Credit Score

Understanding Your Credit Report and Credit Score

What many prospective borrowers don't realize is that the pricing of mortgages and other loans is based in part on their credit-worthiness. Consumers need to be aware of how their credit is evaluated by lenders, and how they can work to avoid so-called "bruised credit" people with a lower credit score can find themselves paying a higher interest rate, or even denied access to certain types of loans.

A credit report is a detailed history of how consistently you meet your financial obligations, and provides a picture of your financial health based on your past behaviour. A credit score is a three-digit number, usually between 300 and 900, representing your overall credit-worthiness, based on personal information from your credit report and other sources.

Both your credit report and score are important. When deciding whether or not to grant a mortgage loan, lenders refer to an applicant's credit report and score, along with a range of other factors such as income, employment history, and size of down payment.

The higher your score the more likely you are to be approved for a mortgage and receive favourable rates because the lender considers you to be a better credit risk. Several factors are used by the two credit agencies in Canada (Equifax Canada and TransUnion Canada) to calculate credit scores:

  • Debt payment history.

  • Amounts owed compared to your current credit limits with lenders.

  • How often you seek new credit.

  • Length of time you have had credit accounts.

  • Type of credit, such as car loans, lines of credit, credit cards.
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A. Mark Argentino
P. Eng. Broker
Specializing in Residential & Investment Real Estate

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RE/MAX Realty Specialists Inc.

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  1. Sometimes I think that even the sneezing of butterfly can influence person's credit balance.

  2. Hello Humanus,

    You are absolutley correct! This is a perfect example of "The Butterfly Effect"

    All the best!

  3. Well, but I don't think that in this sphere "Butterfly Effect" means something good. But how can ordinary consumer affect it? :(

  4. Hi humanus,

    You are correct, not good, but still affects it.

    The consumer hurts their credit score in many subtle ways that they may or may not know about. Everytime they accept the terms when applying for a new credit card their credit score goes down. Each time you fill out one of those forms for 'don't pay for a year' your credit score reduces. Anytime that your credit is 'pulled' your score will decrease. The logic with the lenders is that you must be a poor credit risk if you are shopping around at different financial institutions looking for credit.

    I am sure there are other ways of how the consumer can cause their score to drop, but these are the most common.

    Thanks for your questions and have a good day!