How and Why Credit Score Can Change?

Your Credit Score Could Be Changing Without You Doing Anything Different

Your credit score is important. Lenders look at this score when they’re deciding whether to give you a loan. If you have a good score, not only are you more likely to successfully get loans, but you’ll also receive more favourable interest rates. If you have a poor score? It becomes tougher to get credit and you’ll pay more for the loans you are able to get.

What Upcoming Changes to Credit Scores Could Mean

Your credit score could soon change without you doing anything differently.

The credit score that the major Canadian banks – and 90% of Canadian lenders – use is called a FICO score. FICO is an American company that generates credit scores and then sells this information to both Equifax and TransUnion, which are the two major credit bureaus in Canada.

If a lender wants to find out more about you before giving you a loan, there’s a good chance they’ll check with at least one of these credit bureaus.

This makes the fact that FICO recently announced changes to the latest version of its FICO score very significant.

What Changes Are Coming to Credit Scores

The upcoming FICO credit score changes don’t change what information is used to calculate the score, but the new version of the FICO credit score takes a different look at the information and how it affects your overall credit score.

While the exact formula of how credit scores are calculated remains secret, the new model aims to take a more historical view of your payments into account and it is able to process much more information than before.

The model also puts more emphasis on debt levels and aims to track personal loans more closely.

Instead of looking at just a “snapshot” of your current credit situation, the new formula will look at the past two years or more. This is done to give lenders more insight into how a person manages credit over time. This means that even if you typically manage your debt well, changes in your financial behaviour could have a big impact.

Individuals who have difficulties paying their minimum payments in time, they will see a lower FICO credit score in the next credit score update.

The reason why the new credit score model was created is that the new algorithm will create a larger gap between the clients who are considering with good credit risk and those who are not in that range.

However, the good clients who are continuing to pay their own minimum payments in time and even willing to pay more than just the minimum payment, they will receive a higher score than before. On the other hand, the other category if the clients will receive a dip in their credit score, even below 600.

The more historical view will allow lenders to see not just your payment history over time, but also how your debt levels have changed. This means if you have had a good payment history over the years, but started carrying larger balances in the past few months, for instance, your score might suffer.

Reasons why the credit score change is:

• Payment history
• Different scoring systems
• Differences among credit bureaus
• Differences among credit bureaus
• Updated Continuously

When you apply for another credit card, line of credit, by a car, home, every time the bank will do a credit check before that. It depends on how the credit check was performed by the bank, the credit score will change:

1. Hard credit check
2. Soft credit check

It’s completely normal for credit scores to fluctuate. Hard inquiries will slightly lower your credit score in the future. These type of inquiries can be seen by other lenders and other institutions can review your report. If you apply for credit or services, a record of that application will be added to your credit report.

What Credit Score Changes Could Mean

The new FICO credit score version aims to spot certain financial behaviours that could indicate that you are having trouble managing your debt. For instance, a person who consolidated their credit card debt into a personal loan, then ran up a big balance on their credit cards once again, could be on the verge of financial trouble and this will be reflected in the new score.

Situations like this one are why the new scores put more emphasis on historical debt levels.

Recent missed payments and using a high percentage of the credit available to you will also be looked at more negatively.

FICO says that most people will see a small change in their credit scores (about 20 points up or down). However, those who already have very good credit may see a greater increase while those who have recently begun carrying a high balance (such as someone who had to put more on their credit cards due to a job loss) might see a bigger downswing in their score. Having a consistent financial situation becomes more important with the new scores. It’s not just about how your finances look now, but how they have looked for the last couple of years.

The new FICO credit score version should likely go into effect this summer.

How to Get Your Credit Score

Canadians can get a free copy of their credit report by mail by requesting a copy from TransUnion and Equifax. However, if you want an electronic copy, there is a charge. There is also a charge to see your credit score, though some financial institutions may provide credit score details to their clients for free.

How to Improve Your Credit Score

The information included in your credit score includes:

• Your payment history
• The amounts owed on various credit accounts
• The length of your credit history with each creditor
• Your credit mix (how many different types of accounts you have: credit cards, loans, mortgages, etc.)
• How many new accounts you have opened recently (research shows that people who open a lot of new credit accounts in a short period are likely to be struggling financially)

In most situations, your payment history is the biggest single factor. Lenders like to see that you have a successful history of borrowing reasonable amounts of money and paying it back on time. Your credit history will become even more important with the new FICO credit score changes, since the new score takes a more historical look at your credit situation.

However, even with the changes, making payments on time, not borrowing too much, and not applying for credit you don’t need continues to be the best path for improving your credit score.