The credit scoring system became prevalent during the 1960s as a way for lenders to quickly evaluate a potential borrower’s creditworthiness. The system accurately predicted financial risk over time and grew to several different industries. Today, credit scoring is used by lenders, insurers, landlords, employers, and utility companies to evaluate your credit behaviour.
Thousands of credit scoring formulas exist today. Each unique credit scoring system is accurate and correct for its own application. The credit scores you can order online use an algorithm created for consumers that approximates these different formulas. Your online credit score may vary a bit from the score your lender uses, but it should still give you a good idea what you’re working with.
Credit scoring formula takes into account several factors from your credit profile. The impact of each element fluctuates based your own credit profile:
- Payment history: A good record of on-time payments will help boost your credit score.
- Outstanding debt: Balances above 50% of your credit limits will harm your credit. Aim for balances under 30%.
- Credit account history: An established credit history makes you a less risky borrower. Think twice before closing old accounts before a loan application.
- Recent inquiries: When a lender or business checks your credit, it causes a hard inquiry to your credit file. Apply for new credit in moderation.
- Types of credit: A healthy credit profile has a balanced mix of credit accounts and loans.
When you’re preparing for a major purchase, check your Credit Profile and Credit Score from TransUnion. Looking at your profile and score a few months before your loan application will help you get a complete picture of your credit health.
Worried if your credit score makes the grade? If your credit score is above 650, you’ll probably qualify for a standard loan. Under 650, you may have trouble receiving new credit. If your credit score is a little low, pay your bills on time, reduce your debt, remove inaccuracies, and avoid new inquiries for a few months to give your credit a boost.