A credit score is a three-digit number that reflects how responsibly you manage debt and repay borrowed money, including loans, credit cards, and lines of credit. Credit score levels typically range from 300 to 900, with anything above 750 considered an excellent credit score. A number below 680 indicates a need to improve your credit score. This simple number helps lenders make quicker, more informed decisions while encouraging consumers to build and maintain healthy financial habits.
Credit score levels are available from credit bureaus, banks, financial institutions or any other third-party credit score providers. However, the number provided by each of these institutions might be different. It might be perplexing and, at times, also frustrating for individuals who are trying to improve their credit score but don’t know which number to consider as their starting point. In this article, we break down why this happens.
The bases of a credit score
Credit scores are usually calculated based on the information collected by credit bureaus. Canada has two primary bureaus – Equifax and TransUnion. Generally, credit bureaus collect information such as personal details – your name, age, address, details of credit availed – type, quantity, credit inquiries by other lenders and public records like bankruptcies, consumer proposals, etc, and they collect this information independently.
Here are some of the key factors they look at when determining your credit score:
- Payment history: If you have paid your outstanding debt on or before the due date
- Credit utilization ratio: What is the total credit utilization compared to your overall credit limit
- Credit history: How long you’ve been availing credit
- Types of credit: Mortgages, credit cards, etc
- Credit check: When and how often do lenders check your credit report
Credit score variance
Needless to say, the information about your financial activity is standardized. Therefore, it’s completely reasonable to question why your credit score result might differ. Here are some reasons why:
Different scoring formulas
There’s no one single formula for calculating credit scores. Each bureau may be using a different formula. Even within the same credit bureau, you might see variations depending on the different types of scoring models utilized. FICO and CreditVision Risk Score are two of the main credit scoring models. Each of them attaches, among other things, different weightages to the factors mentioned above, thresholds for dues, and utilization rates. This causes credit scores generated by both models to be different, leading to varied credit score levels reported by both bureaus.
Difference in the timing of receiving the information
While the information reported to the bureau is accurate, the time at which the information is received is different. Credit scores are not static, they change as new updates are received. If one bureau updates your information sooner than the other, you might see a difference in your score. Also, lenders report information to the bureaus at different times.
Inaccurate information
Sometimes, credit score differences could be due to errors. Wrong account balance, or accounts that don’t belong to you, incorrectly taken into consideration by a bureau, may lead to discrepancies. Furthermore, not all lenders report to both bureaus, depending on their polices. So, one may have more accurate information than the other. Some lenders may also not report your financial activity to the bureau at all, hampering credit reporting. There could be changes in your personal information, which could also lead to differences. For example, if you go by a different name than your birth name and the bureaus have not reconciled the information, it could lead to discrepancies.
Dealing with different credit scores
It’s normal to have a slight variation in credit scores from different agencies due to differences in models and formulas used. However, if it’s on account of errors, then action must be taken. Check your credit reports regularly. You can obtain a free credit score and report from the credit reporting agencies. Scan them for any inaccuracies. Ensure that all the credit lines reported are indeed availed by you. Regularly checking them can help you catch any errors. In case you spot them, raise a complaint with the reporting agency and have them corrected. Always request a report from both agencies to get a thorough picture. Pulling up your credit reports will not harm your credit scores because you’re not applying for any new credit, so you’re free to do it regularly.
Improving your credit score
Considering that, largely, having different credit scores is beyond your control, it might be more prudent to focus on maintaining good credit habits. Credit reports are accessed by authorized third parties, like lenders and employers, to help them assess your creditworthiness. Pay bills on time and keep your credit balance low to improve your average credit score levels. Having a good credit score level is vital as it leads to several benefits, including faster approvals on future lines of credit and other consumer credit, higher credit card limits, good prospects for a credit card loan, if needed, and lower interest rates, among other things. Even landlords tend to pull up credit reports. A bad or a fair credit score may not yield benefits. So, focus on managing your credit properly to enjoy the benefits of a good credit score.
If your score has taken a tumble because of unmanageable debt, consider getting a free consultation with one of our trained Credit Counsellors. They’ll discuss your options and help you start on your way to a debt-free life and a better credit score.
