Regardless of the financial milestones you’re reaching, when it comes to financial progress and credit, it’s important to understand the factors that may impact your credit score.
One of the key behaviours that lenders and creditors like to see is on-time payment of bills. Since this is one of the strongest predictors of a consumer’s likelihood to meet their financial obligations, it is an important factor in credit scoring models.
Here are some of the other important factors. Consider the following:
Do you have different types of credit accounts?
Credit scoring models look at the mix of different types of credit you have, such as credit cards, installment loans, mortgages, and store accounts. Creditors like to see that you’re able to handle multiple accounts of different types and your credit score reflects this.
How many new credit accounts have you opened recently?
Be mindful of opening too many accounts at once. Scoring models look at how many new accounts you have as well as how many new accounts you’ve applied for recently. This may indicate you are planning on taking on lots of new debt which could indicate a greater credit risk.
How old are your credit accounts?
In general, creditors and lenders like to see that you’ve been able to properly handle credit accounts over a period of time. Two years of active credit accounts with more than two types of credit are important. It’s best to open a credit account, like a credit card, at least two years before obtaining a mortgage.
Are your balances high relative to your total available credit limit?
Creditors and lenders prefer to see a lower ratio of how much debt you’re carrying compared with how much available credit you have on a particular account. Ideally it’s best to keep the credit balances below 75% of the limits and keeping the balances are 50% are even better!
Do you have any judgments, liens, bankruptcies, or delinquencies that have been reported to the credit bureaus?
Having this type of information on your credit history may impact your credit score. If you have gone through financial hardship, and had to file for bankruptcy, your credit score will reflect this negative information for six to seven years. It’s very important to rebuild good credit after a bankruptcy. Start with a secure credit card. A deposit is provided to the lender and the credit card limit is issued base on this deposit amount. For example a deposit of $1,000 can help obtain a credit card with a $1,000 limit. Credit must be re-established and a two year history of re-established credit is needed after a bankruptcy.
Bank of Canada
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