WHAT'S A CREDIT SCORE AND HOW DOES IT WORK?

We get a lot of questions from our clients about credit scores. Specifically, they want to know precisely what it means, how it works, and what they can do to improve their score. Of course, they are also curious about how filing for bankruptcy will affect this score.

Let’s begin with the basics: anyone who has borrowed money has a credit score.

If you’re currently confronting a substantial amount of debt and don’t know how to start fixing your finances, one of your first steps should be to understand what your credit score means and what goes into calculating it. Here’s what you should know.

(Speaking of debt, visit this page next to learn more about debt solutions in Edmonton)

What Your Credit Score Means

Your credit score helps determine your level of financial responsibility. Lenders use it to assess how likely you are to pay them back before offering you a loan. In addition to considering how much of a loan they will offer, it can also determine if they will provide you with a loan in the first place. Credit scores range between 300 and 900. Anything over 600 is usually acceptable, while a score under 550 is considered harmful.

Different lenders have different minimum scores for lending money, so there’s no universal standard for getting a loan or a mortgage. However, consider that lenders willing to lend money to people with low scores will typically charge higher interest rates.

How Your Credit Score Is Calculated

The following is what goes into determining your credit score:

Payment History (35%). Making payments on time is a critical factor in establishing a good score. As with collections and consumer proposals, missing or late payments and bankruptcies will result in a lower rating.
Outstanding Debts (30%). As long as you pay your debts, you’re in good shape. However, the more money you’ve borrowed and have yet to pay back, your credit score will be lower.
Credit History (15%). A long credit history says more about your financial habits than a short one. This is why it’s a good idea to start building your credit early; with small loans, you’ll be able to pay it back.
Recent Credit Inquiries (10%). Lenders will often inquire about your credit. Numerous recent requests to check your credit can negatively impact your score, although not as much as missed payments.
Credit Diversity (10%). Like credit inquiries, this isn’t a massive part of your credit score, but it matters. Having many different types of credit demonstrates an ability to manage your finances well.

How To Repair Your Credit

It’s always possible to repair your credit, but you might need help. For starters, this post covers how to rebuild your credit after personal bankruptcy. It can take up to three years before your credit score climbs back over 600. Debt and credit counselling can allow you to understand your options. Some people may benefit from a change in spending habits, while others may need to consider a consumer proposal or bankruptcy.

On the subject of spending habits, could you be overspending? Take a look at this blog post next to read about six signs you’re overspending and what you can do about it

Find A Licensed Insolvency Trustee In The Edmonton Area

Whether you live in Edmonton, Sherwood Park, Fort Saskatchewan, or St. Albert, you can count on Fox-Miles & Associates Inc. to help. Call us today to find out how we can help you achieve financial independence.

This post was first published in 2020, but it was updated in 2021 just for you.

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