What Impacts Your Credit Score in Canada?
While a lot of auto loan and financing institutions only look at your credit score to decide if they want to approve you for a loan, here at Abbotsford Auto Loans, we think that there should be more criteria involved than just your credit rating. We like to look at the big picture, not just your credit score to see everything else going on in your finances. We take the time to really learn and understand your situation to get a more accurate portrayal of finances. Because we’re in the business of getting you approved for an auto loan, not denying you an auto loan.
A lot of times when we’re going through our auto loan process with a customer, they’ll be aware of what their credit score is and what it means to loan agencies. But customers frequently ask us,
“What impacts my credit score?”
Credit ratings are influenced by a number of factors determined by you and your money management history. There are five major factors that impact your credit score. The better these components are handled, the higher your credit score is likely to be.
1. Your Payment History
The biggest and most important factor that can impact your credit rating is your payment history. Having a consistent history of paying on time can be the difference between an average and exceptional credit score. Skipping credit card bills or waiting until they’re past due can quickly lead to a damaged and much lower credit rating.
2. Amount Owed
How much of your available credit are you using? The total amount you owe compared to your available credit has become an increasingly large factor in your credit score. It is calculated on an individual account basis and an overall basis. The credit reporting agency, Equifax, recommends keeping credit card account balances below 75% of your available credit. Anything above that runs the risk of negatively impacting your credit score. So, if the limit on your credit card is $2,000, try not to accrue a balance above $1,500.
The less you owe, the better—to a point. Lenders want to see that you’re responsible and financially stable enough to pay back money lent to you, so owing less is better than owing nothing at all. This is why having no credit history can make it challenging to secure a loan.
3. Length of Your Credit History
Your credit rating is also impacted by how long you have been using credit. How many years have you been using credit? How old is your oldest account, and what is the average age of all your accounts?
Having a longer history on your credit accounts earns more points on your rating, so avoid closing accounts if you can. A good credit history is built over time—and there’s no quick fix for that.
4. Credit Inquiries
There are various types of credit inquiries. These include hard and soft inquiries. Hard credit inquiries occur when a financial institution, such as a lender or credit card issuer, checks your credit to decide whether to approve you for a loan or credit card. A hard inquiry commonly occurs when you apply for any of the following:
– Auto loan – Business loan – Mortgage
– Student loan – Personal loan – Credit card
Soft credit inquiries occur when you request your own credit report, or a business checks your file for updates to your existing credit accounts. These soft inquiries will not appear on your file or lower your credit rating.
If there are an abnormal number of credit inquiries occurring in a short amount of time, it can negatively impact your credit rating. This unusual spike in inquiries could indicate financial difficulties, but it could also mean that you are moving to a new city, which is causing you to apply for a new mortgage or bank account (hard inquiries), as well as new electric/gas accounts, cable, phone, and other utilities (soft inquiries).
5. Types of Credit in Use
Having a mix of credit products, such as a mortgage, car loan, and one or two credit cards is considered healthier than having only multiple credit cards. That’s because credit cards are revolving loans, with variable debts and payments, while a mortgage or car loan is an installment loan, with a fixed balance and payments.
Managing installment and revolving credit shows potential lenders that you can handle different types of debt successfully. Try and find the right balance among different types of credit for your current financial situation to help improve your credit score.
However, this is a smaller component of your score compared to other variables, like on-time payments. Don’t worry if you don’t have accounts in each of these categories, and don’t open new accounts just to increase your mix of credit types.
The Bottom Line about Your Credit Score
Your credit rating is an important factor when it comes to getting approved for loans and to ensure you get the best interest rates available. If you manage your credit responsibly and make your payments on time, then your rating will become a positive financial factor for your future.
If you have more questions or are ready to talk to an auto loan expert, contact one of our team members in Abbotsford, BC! Our team excels at helping people with all types of credit get the auto loan they deserve.