I’ve paid interest on my credit card before, but I don’t remember when. I have always paid off the balance in full every month, except for rare exceptions over a decade ago. I have a line of credit that is used occasionally and that I never leave debt on for more than a few days. I don’t neglect any invoices. My mortgage is being repaid without a hitch by direct debit.
I am far from perfect in managing my money. But when I ordered my credit report 10 months ago, I breathed with the confidence of the little kid in class who finishes their chemistry exam 30 minutes before everyone else. Then I received my score: 778 out of 900. I was disappointed.
The score is excellent and allows me easy access to credit on favourable terms. But on a scale out of 100, how much is that? 86%. That’s good, but nothing for your parents to show off in front of their friends: “My Daniel got 86% in chemistry.” Below 90%, you just satisfy yourself by saying that your little prince is doing well in school without going into detail, and follow up with a comment on the changing climate: “It seems like summer is shifted, don’t you think?”
My Equifax report says my credit score is better than 55% of Canadian consumers. Which means that it’s worse than the other 45%. It’s relatively average. You know how it is, we usually find satisfaction in comparing ourselves to others, like those rare times when our line goes faster than the next at the grocery store.
So, I’m precisely paying off my bills and debts, and almost half of Canadian consumers score better than me. This suggests that the financial situation of households in the country is not as bad as it seems, but more importantly, it raises a question: how are they doing it?
Calculating a credit score, unlike chemistry, is an occult science. Apart from those who trade in it, nobody knows exactly how it works. Equifax and TransUnion (the two companies that compile credit reports in this country) do not disclose their formula under the pretext of trade secrets.
We do not know the exact details of the calculation methods, but we know the main principles nonetheless. Here are the factors that are taken into account:
• Payment history. Paying off your debts and bills, like cable or cell phone, before the due date is good for your credit score. Delays of 30 days will mar your file, even more so if you exceed 90 days.
• The level of debt in relation to credit capacity. Credit rating agencies view full credit cards and lines of credit with suspicion. Ideally, it is best not to exceed 50%.
• Credit applications. The more applications you make, the more your record is likely to be affected. If you’re shopping for a mortgage, be sure to focus your efforts within a tight timeline. The system will then only count one application.
• The types of credit used. The more you use different means of borrowing, the better. If you have a credit card, a line of credit, and a mortgage, your record will be better.
• Credit experience. The longer you have used credit, the easier it is to determine your borrower profile and your ability to manage your debts.
• Bankruptcy and consumer proposals. These are to be absolutely avoided, because they mar a record for six years, even more so in the event of a recurrence.
I excel on all factors, especially the most important: payment history and amount of debt. While my mortgage balance may seem high to some people (it’s the norm today), I am using a tiny fraction of my consumer credit capacity.
I’m losing points on small details. For example, my credit experience does not exceed 30 years.
My prudence also works against me. I only have one credit card and I have an aversion to those offered by stores. Rating agencies favour those who have more than one active card. Beyond six, it starts to work against you. Four seems to be the optimal number, as long as you don’t use more than 30% of their capacity.
Moral of the story: to reach the perfect score, it is not enough to be studious, you also need to have a slight bad boy side. You have to take risks and demonstrate that you know how to deal with them.
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The credit score is assessed on a scale of 300 to 900 points. The higher it is, the more lenders trust you.
Above 700: you can negotiate favourable conditions.
From 500 to 700: you will get a loan if you apply for one, but at a higher cost.
Below 500: Lenders will be reluctant to lend to you. And if they do, your negotiating room will be next to nothing.
