Beacon Score Canada: Why It Matters When Financing Businesses
In Canada, your Beacon Score is like the golden ticket that unlocks doors to financial opportunities. It significantly affects your ability to secure credit, loans, and even rent an apartment. A higher score shows you are more likely to manage your credit responsibly and make timely payments. As a result, you become a more desirable borrower in the eyes of lenders. For those looking for financial stability and favourable lending opportunities to finance their small business ideas or whichever need they have, it is crucial to understand Beacon Score Canada and what it’s all about.
Let’s learn more!
What Is a Beacon Score?
The Beacon Score, often called the FICO Score, is a three-digit number that determines whether your credit is good or bad. It is one of the two measures on a credit report that summarizes how a person has used credit in the past. The report usually indicates all the outstanding credit facilities (such as credit cards, lines of credit, bank loans, and vehicle loans) and how well you’ve kept up with repayment. It also shows your total available credit and a list of all the places you have inquired for credit (for instance, at a vehicle dealership or by inquiring about a cell phone plan).
Furthermore, the Beacon Score assesses previous credit performance and tells a story about an individual’s past and current credit history, so financial institutions and other lenders use it to anticipate future behaviour. If a person has a bad credit report, a history of missing or late loan payments, or has made what a lender considers “excessive” credit inquiries, their personal credit score will be low.
Why Does Beacon Score Matter, and How Does it Change?
A Beacon Score ranges from 300 (poor) to 900 (excellent). Financial institutions often won’t lend to individuals with scores below the middle 600s. Although a person with Beacon scores between 620 and 650 can secure a loan, they could pay a higher interest rate or require more security (such as a larger lien on their assets).
Your Beacon Score affects other tools that lenders use to assess credit worthiness. For instance, the “bankruptcy navigation index” (BNI) usually predicts the likelihood of future bankruptcy, and a good Beacon Score will help ensure your BNI rating is in a positive range.
Your Beacon Score usually changes over time. The key causes of these changes are:
- Payment history on credit cards and loans
- Any bankruptcy history
- Amount of outstanding and available debt
Consent to examine your credit rating is often requested whenever you apply for credit. The provider will then use this data to approve or decline your request. If you are approved for the credit, the provider will report to the credit agency on your use of the credit over time.
How Is the Beacon Score Calculated?
Credit bureaus use their algorithms and have varying options that a lender may request when doing a hard credit check to make a credit decision. Although the exact method by which the Beacon Score is calculated is kept secret, there are factors considered by almost all credit card issuers, which we will discuss below.
Lenders can request different variations of a credit score depending on the type of credit the borrower is looking for and their relationship with credit reporting agencies. Some lenders may only work with one credit bureau, but others compare credit ratings from the leading providers.
What Are the Factors That Affect the Beacon Score?
1. Past Payment History (35% of the Score)
Payment history is the most vital factor in your Beacon credit score. Lenders want to know if you can pay back the money you’re borrowing.
Your payment history usually reflects all the payments you make to your consumer debts. Every time you pay off your credit card, line of credit, vehicle loan, student loan, personal loan, cell phone on contract, or any other debt, your creditors make a report.
2. Types of Credit Used (10% of the Score)
Since it accounts for 10% of your overall credit score, this factor is the least important, assuming there isn’t much else on your credit report. Different types of credit usually show how you handle your money overall. For instance, deferred payment plans or interest can show that you are not able to put money aside in advance for purchases.
3. Number of Credit Inquiries (10% of the Score)
Although the number of credit inquiries has a minor effect on your credit score, it is still important to manage your credit applications wisely. We recommend avoiding making too many unnecessary credit applications, especially in a short period.
4. Credit Use (30% of the Score)
This usually refers to the amount of credit you use compared to your available credit. High credit usage, where you’re using a large portion of your available credit, can negatively affect your score. We recommend maintaining your credit usage below 30 percent of your available credit.
5. Length of Credit History (15% of the Score)
If you’ve had credit for a long period, your credit report should give an accurate picture of how you use it and, if you had it, how you got through a difficult time. Usually, a longer credit history is regarded as more favourable, as it gives a more detailed view of your credit behaviour.
Tips on Improving Your Beacon Score
1. Pay Your Bills on Time
Paying your bills on time has a significant impact on your Beacon Score. Always paying your payments on due dates shows that you have responsible financial behaviour, which can boost your score significantly over time.
2. Avoid Holding Excess Credit
While having a diverse credit profile is crucial, applying for too many credit cards within a short period can be perceived as risky behaviour. Normally, when applying for a new account, a hard inquiry is typically generated on your credit report, leading to a temporary decrease in your Beacon Score. We recommend applying for credit when necessary, spacing out your applications, and sticking to the lowest interest rate card.
3. Don’t Seek Excess Credit
While having a diverse credit profile is vital, switching between cards or applying for new credit (due to low starting rate enticements) will hurt more than help. Each new account application usually generates a hard inquiry on your credit report, lowering your Beacon Score. Therefore, we recommend applying for credit only when necessary.
4. Regularly Review Your Credit Report
Review your credit report for errors or inaccuracies by requesting a free copy from Equifax Canada or TransUnion Canada. Re-enter the credit reporting service to address any errors detected immediately, as incorrect data can negatively affect your Beacon Score.
5. Keep Old Accounts 0pen
Even though it can seem like a smart idea, closing old credit accounts could lower your Beacon Score, the length of your credit history is an essential factor, and closing your old accounts may reduce the average age of your accounts. If you no longer use your old credit card, consider keeping it active with a low balance or using it sometimes to retain its positive impact on your credit score.
6. Reduce Credit Card Balances
Cut down on credit card debt by maintaining balances below 30 percent of your available credit limit. If you want to keep your Beacon Score high as a small business owner, you should avoid maxing out your credit cards and instead focus on paying down your balances.
7. Maintain a Diverse Credit Mix
Maintaining a mix of different types of credit accounts, such as loans, mortgages, and credit cards, positively contributes to your Beacon Score. It’s, however, important to manage these accounts responsibly and avoid unnecessary debt as a self-employed individual.
Frequently Asked Questions on Beacon Score Canada
1. What is a good Beacon Score in Canada?
Even though there are different ways to calculate credit scores, generally, credit scores of 660 to 724 are good, 725 to 759 are very good, and 760 and above are excellent.
2. What is Beacon Score Canada?
The Beacon Score, often called the FICO Score, is a three-digit number that determines whether your credit is good or bad. It is one of the two measures on a credit report that summarizes how a person has used credit in the past. A Beacon Score ranges from 300 (poor) to 900 (excellent).
3. What is Beacon 5.0 Score?
Beacon 5.0 Base is among the three credit score types that Freddie Mac and Fannie Mae accept. It is the most common model for home loans. These Beacon 5.0 scores are actually derived from the FICO Score 5 model. In contrast, the Beacon 09 scores are based on the FICO Score 8 and are solely used in Canada.
4. What is the Beacon 9 Score?
Beacon 9.0 is the initial general risk score to use Canadian mortgage data. It offers improved predictive ability when assessing consumers with mortgage tradelines in their credit histories.
5. Is 662 a good credit score in Canada?
A good Beacon Score ranges between 660 and 724. A credit score between 725 and 759 is very good, while 760 and above is excellent. However, people with credit scores between 620 and 650 can secure a loan.
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