January 7, 2007, 11:00 am

Factors that influence your Credit Score

by: admin    Category: Credit Rating & Credit Bureau
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You obtained a copy of your Credit Bureau (by the way, you can get a free credit score without a credit card!), you know how to read it but you are left unsatisfied of your Beacon Score? Good news! There are some easy ways to improve it. In this section, we will look at several factors that influence your Beacon Score and how to turn them into positive points.

In the first part of your Credit Bureau, the credit reporting agencies show the percentage of the available limit used. The more you use your credit to the max, the worst your credit score will be. Financials institutions consider that you may have difficulties managing your revolving credit (credit cards and lines of credit). Therefore, they will be more reluctant to grant more money. Try to keep your balance as low as possible. This will show that you are not in a desperate need for credit and you know how to manage your personal finance. Keep in mind that the worst thing you can do is to max-out all your credit cards. You are better off increasing the limit for a small period of time. However, if you ever do such thing, you must not use the extra room you just created. The goal is to keep your balance low and not to increase your limit anytime you want. In the end, financial institution will decline your request after too many attempt to increase your present limit.

Interesting information can be found in the summary. It is the number of months of credit history. That provides the exact number of month you have been using any kind of credit that is reported to those agencies. A credit score is a reflection of the bank’s confidence in you. As you use your credit over the years, more and more institution will approve your request based on your good credit history. It is your only way to prove that you can pay back your debt over time.

Every institutions rank your credit account from R1 to R9 (see chart below). The number of late payment and the gravity of each of them will be a major factor in the establishment of your beacon score. If you miss a payment recently, your credit score will decrease drastically. On the other hand, a late payment occurred fours years ago won’t affect your Beacon Score that much. You must be aware that late payments are reflected on your credit bureau for 7 to 10 years. Therefore, it is primordial to make the minimum payment on all your loans in order to avoid bad marks from banks. You may also conclude that it is not easy to rebuild your scoring from the moment you broke financial institutions’ confidence.

Number Rating

R0 Too new to rate; approved but not used

R1 Pays within 30 days of billing, or pays as agreed

R2 Pays in more than 30 days but less than 60 or one payment past due

R3Pays in more than 60 days but less than 90 or two payments past due

R4 Pays in more than 90 days but less than 120 or three or more payments past due

R5 Account is at least 120 days past due but is not yet rated R9

R6No rating exists

R7 Paid through a consolidation order, consumer proposal or credit counselling debt management program

R8 Repossession

R9 Bad debt or placed for collection or bankruptcy

The number of opened account is also a factor that may change the bank’s perception of your file. Personally, I suggest having 3 to 4 credit cards and one line of credit. It should be more than enough to fulfill all your needs. You must remember that the more account you have, the lower your credit score will be. The reason is fair and simple. Credit accounts bring you the possibility to indebt yourself. If you have too many, you may crumble below a ton of debts. According to this fact, try to avoid applying for credit cards during promotion to win a single t-shirt!

The number of credit inquiries needs to be explained to your lender. Your credit bureau will show if you are presently shopping around for a better rate or because you are in a desperate need for credit. This is why you need to be honest to your banker and explain up front why you have so many recent inquiries if this is the case.

Another important thing is to disclose to the potential lender if you ever went bankrupt or if you did a consumer proposal. Those stay in your credit bureau for seven years and could ruin your beacon score for a longer period of time. A consumer proposal happens when an individual can’t afford to pay his present debts and offers his creditors to pay only a part of the debt by smaller payments. The creditors then take the unpaid amount as a lost. Some say it is better to go bankrupt but the only thing I can tell you is that it doesn’t make a big difference for the lender. In both situation, the individual didn’t meet his financial obligation and the grantor took a lost. Then again, the bank’s confidence in you is broken for several years.

As you can see, many factors influence your beacon score and its calculation is heavily complex. It is important to be aware of behaviours that may hurt your credit bureau and modify your way of using credit.

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[…] carefully to his story as he sounded genuine. Unfortunately, his late payments kicked down his Beacon Score pretty hard. In fact, this was the type of file that is being declined by our banking system […]