Bankrupt or not, every Canadian wants to know how his or her credit score is calculated. This is good to know right from the beginning, so you can work on rebuilding your credit after bankruptcy the right way. Some of these factors are easy to work with, but take time to implement. So, if you’re hoping to apply for a mortgage tomorrow and haven’t put much thought into how your credit score is calculated, you may be out of luck if you’re just figuring this out now.
Of course, the exact formula use for calculated your Beacon or Equifax Canada credit score is kept secret, it’s generally accepted that the following is used as the basis for how your credit score is calculated:
35% – Payment History — Pay your bills on time! Set up automated or pre-authorized bill payments to avoid missing payment due dates. Even one late or missed payment can seriously ruin your chances of getting credit after bankruptcy – much more than for non-bankrupt people.
30% How Much You Owe — If you max out all of your credit cards, your credit score will be negatively impacted. (You will probably be using only secured credit cards if you’re recovering from bankruptcy in Canada). Try to keep credit card balances under 50% (or less) of the limit if possible. The lower the better!
15% Length of Credit History — Since you aren’t allowed to carry any credit through a Canadian bankruptcy (with minor exceptions, like a leased car with no equity), your credit will likely be new. This is why it’s important to start re-establishing credit as soon as possible and continue using it. The length of credit history refers to the time since your credit account(s) were opened up to and including the last date of activity. Make sure you make your payments on time each month (at least the minimum payment). Also make sure you use your credit cards (which will probably be secured credit cards) on a regular basis, as accounts that have a zero balance and no activity do not have any positive impact on your credit score.
10% New Credit —This refers to the number of newly opened or recently applied for credit and credit inquiries. Since ex-bankrupt Canadians have fewer options available to them, be extremely selective when applying for any credit. Ask lots of questions ahead of time, before submitting an application. Only apply if it seems very likely that you will be approved. Do not apply for or open up frivolous credit accounts.
10% Mix of loans — A seldom known factor in determining credit scores is the various TYPES OF CREDIT you have. Everyone, ex-bankrupt or not, should have a variety of different types or loans or credit. Instead of just having several secured credit cards, have just one or two secured credit cards, a car loan or line of credit (may be challenging to obtain with a previous bankruptcy). Some cell phone companies report to the credit bureaus too, if you are on a contract cell phone plan.
Now that you know how credit scores are calculated, you can see why it is important to start working on this right away, as soon as possible after your bankruptcy discharge. Start with what you can. For most recently bankrupt Canadians, it will be a secured credit card from Home Trust Visa or Peoples Trust MasterCard. Then add what you can when possible, but don’t overdo it. Three or four credit accounts should be fine for most people, providing your income can support it.
Use your credit wisely. Some credit issuers or lenders may be willing to extend credit to someone with a recent bankruptcy, but only after a certain period of time has elapsed (often two years after the bankruptcy discharge), or under the condition that the applicant already has some sort of newly established credit for at least one year after the bankruptcy.
Obviously, if you want to apply for a mortgage tomorrow and are just thinking about your credit score now, you’ll probably be out of luck! Start planning ahead now. Once you’ve got these things set up, you can “set it and forget it” — just continue using and paying for your credit and watch your credit score keep going up!