It’s Christmas time – and shopping time – once again. But before you head out on what is the most expensive shopping expedition of the year for most people – and potentially harm your creditworthiness – it might be a very good idea to take a critical look at your Beacon Score.
A Beacon Score results from a set of complex algorithms used to establish a person’s credit rating. It takes into account your payment history, current debt load, and number of new credit applications. Final calculations range from 300 to 900 and tell a financial institution how likely it is that a customer will repay the loan within 24 months.
Beacon Scores are typically used by lenders to determine the level of interest to charge a borrower and, in the case of very low scores, whether to extend a loan at all.
Most lending institutions use credit scores from Equifax Credit Bureau or Transunion. These credit bureaus assess five areas of your personal finance, with each given a different weighting:
· Past Payment History (weighting: approximately 35%) – a calculation that considers bankruptcies, late payments, past due accounts, and wage attachments.
· Credit Owing (weighting: approximately 30%) – an amount that looks at how much you owe as a proportion of total credit limits.
· Length of Time to Establish Credit (weighting: approximately 15%) – how much time has elapsed since your accounts have been open and active.
· New Credit (weighting: approximately 10%) – a calculation of recent credit inquiries and recently-opened accounts.
· Type of Credit (weighting: approximately 10%) – assesses the different types of credit used, such as credit cards, retail accounts, mortgage, and line of credit.
According to Canadian Mortgage Trends, the average Canadian adult’s Beacon Score is around 700. A score of 750 or higher puts you in a great position to receive extended credit but if you’re on the low end and hoping to get a mortgage or a large loan for some other reason, you may be able to improve your Beacon Score by:
· Establishing a credit history as soon as possible – lenders like to see a payment history of at least two years on at least two accounts, such as a car loan and a credit card.
· Make all your payments on time – the cleaner your credit history, the better your chances of being approved.
It’s good to know how lenders use your Beacon Score – but it’s even better to know your score is good because your financial life is in order and on track. That’s where a professional advisor comes in. Talk to one today.
This column, written and published by Investors Group Financial Services Inc. (in Québec – a Financial Services Firm), and Investors Group Securities Inc. (in Québec, a firm in Financial Planning) presents general information only and is not a solicitation to buy or sell any investments. Contact your own advisor for specific advice about your circumstances. For more information on this topic please contact your Investors Group Consultant.