Many clients ask what influences their ability to obtain lower interest rates and preferential financing offers; many also wonder how applying for financing affects their creditworthiness. In this month’s newsletter, we examine the three most important things lenders want to know about you before extending credit: your credit history, report and score.
Credit History
Every time you take out a loan or use your credit card, your credit history is affected. Whenever an institution extends you credit, your repayment tendencies are recorded by a credit bureau that collects your information, including how long you take to repay debts. When you look to borrow money, institutions contact a credit bureau to access your credit history. If your credit history is poor, lenders may refuse to give you a loan, or may increase their interest rates to cover the risk of you not repaying that loan.
Credit Report
A credit report is a summary of your credit history at any given time. It is used by lenders to determine if they should extend credit to you. Information is only provided to third parties after you have provided consent, often when applying for a loan, credit card, accommodation, or insurance. Credit reports contain your personal information, current credit situation, banking information, bankruptcy and court rulings, any nonpayments, report inquiries, and any consumer statement to explain specific occurrences.
Credit Score
A credit score is a ranking of your creditworthiness, compared to other consumers, at a specific point in time.Credit scores can be calculated in many ways; the industry standard as used by Equifax uses a scale from 300-900. The higher your score, the lower the risk to the lender.
Your credit score is influenced by a number of factors. Any bankruptcies or outstanding debts will have a negative impact on your credit score. Additionally, payment history (missed payments, credit card balances), account history, and type of credit can also affect your score.
So, can the number of inquiries have a negative effect on your score? The answer is yes, but not to the extent that many believe. When a person does not have a lengthy credit history, multiple applications for credit can raise red flags for potential lenders, especially if your credit history contains payment lapses or defaults. For someone who has an established credit history, and who is simply searching for the best rate for a mortgage from multiple lenders, these additional inquiries are usually grouped together as one inquiry, and have little to no impact on your credit score. Additionally, personal inquiries into your credit score rarely have an impact on your overall creditworthiness.