Monday, January 19, 2009

Cleaning up your credit Part II - interpreting your score

Further to my post on Friday, I'll explain the importance of your score.

Back in my old banking days, this score used to be a "R" rating. R1 was the best possible and R9 the worst. Today, the most common standard used by lenders is the FICO score - see this link for a definition -

Your credit score is a simply a snap shot of your current credit situation and that over the past 6 years. It is an important factor in a lender considering you "credit worthy" for future debt, consolidation, reduction of interest, etc. It's not your total picture. Your report does not factor in your employment status, cash flow, assets, net worth or other important criteria a lender uses when determining to approve or decline your request.

I'm not a lender and times have changed in Canada with borrowing becoming tighter due to the global recession. Thus, there is no magic score one should have but the higher the better. Of course, the other factors I mentioned are paramount as well if you're seeking new credit.

The score range (with Equifax) is 300 - 900. Again, the higher the better. Only 5% of Canadians fall in the 850 or higher range. The highest percentage of individuals (27%) fall within the 750-799 score range. Why does your score matter to a lender? It tells them, based on your past credit, repayment, late payments ,etc., how likely you are to pay your future debts on time, late, file for bankruptcy and so on. For example, scores under 499 have a 78% chance of being delinquent.

You might be asking what score you should have. About six months ago, a score of 640 was considered somewhat average in that a lender would still consider approval based on those other factors I mentioned being strong (job security, assets, net worth, etc.). However, today, with lending tightening, one should aim for a score in the 750 plus range.

If you find your score falling short of the 750 mark, don't worry. Keep in touch this week for tips on how to improve your score or keep it high if you've already taken good care of your credit.

Tomorrow I'll touch on what's on your report and what's not. You might be shocked or pleasantly surprised.

Please leave me a comment if you have a credit question you'd like me to answer.

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