Everyone who’s ever borrowed money to buy a car or a house or applied for a credit card or any other personal loan has a credit file. You’ll be surprised by the amount of personal financial data in your credit report. It contains information about every loan you’ve taken out in the last six years. Whether you regularly pay on time, how much you owe, what your credit limit is on each account and a list of authorized credit grantors who have accessed your file.
“R” refers to a revolving debt, while the letter “I” stands for an instalment account. The numbers go from 0 (too new to rate) to 9 (bad debt or placed for collection or bankruptcy.) For a revolving account, an R1 rating is the notation to have. That means you pay your bills within 30 days, or “as agreed.”
Credit score is calculated using 5 major criteria balanced against each other.
- Payment history: including Bankruptcies, late payments, past due accounts, collections, and judgements. It’s technically all your payment patterns you’ve demonstrated in the last 2 to 7 years
- Amounts Owed: This is the amount you owe or use vs the amount available to you. Show restrain by keeping your balance below 75%, paying on time and making more than the minimum payment.
- Length of credit history:The amount of time you have had your credit products. The key word here is history. This is a great way for lenders to have an indication of your character as a borrower. The best indicator of future behaviour is past behavior.
- New Credit:The number of credit inquiries you have had within the last year. Are you desperately looking for new credit or are you keeping inquires below 6 per year.
Types of credit accounts: This entails Credit Cards, Retail Cards, mortgage lines of credit, Loans and etc. to make things confusing, there are 2 types of credit accounts: Fixed and revolving.
- A fixed account would be a loan with a fixed payment schedule. This is like a car loan. It has a fixed payment set by the bank that you pay over time. Also, you don’t gain to access to credit as you make your payments.
- Revolving accounts are like credit cards. These accounts have a standing limit that becomes available to you to use again, as the payments are made.
- Revolving accounts can have a faster positive effect on your credit. They give you the chance to show “fiduciary responsibility”. This means you show restraint, by not using all the credit available to you. You also build character by making sure your payments are made on time. It’s also good to exceeding the minimum balance owed as a demonstration of good character.
The five elements above are used in an equation that calculates your FICO score. This is also known as your Credit score.
Taking out a loan may have a positive effect on your credit depending on the existing state of your report. A credit specialist can look over your existing credit report and highlight any problems you need to address. A credit score is like a bolder on a hill, it’s not a problem if it’s at the top as it’s easy to keep it there, but, if it starts to fall it can gain momentum and it takes a lot to stop it and more to push it back up.
Take an active interest in your financial education and keep a watchful eye on your score. You can ask for a free copy of your credit file by mail. There are two national credit bureaus in Canada: Equifax Canada and TransUnion Canada. You should check with both bureaus.