As you probably already know, if you have credit in Canada, you also have a credit score. You’re also likely aware that your credit score helps to decide if you’re eligible for other credit accounts like mortgages, car loans, or lines of credit (and how much interest you’ll pay on them). What you may not be aware of is how your credit score is calculated, which factors have the biggest impact on your score, what a good score is and how you may be able to improve it. We’ve put together this post to give you the basics of your credit score so that you can better understand what it is, and how to improve your overall credit health. 

What is a Credit Score?

Your credit score is a three-digit number from 300 to 900 that is based on the information in your credit report. It’s basically a snapshot of your credit history and your current standing on your credit accounts. It’s used by banks and other lenders to help them decide how likely you are to pay back the money you borrow. The higher your score, the better your chances are at being offered credit products, getting your credit applications approved, and having more credit available to you. A better credit score may also mean a better interest rate. Below is a table that shows different credit score ranges and how, generally speaking, financial institutions view them:

How Your Credit Score is Calculated

As touched on earlier, your credit score is a numerical summary of your past credit history and current credit situation. It’s calculated based on a few factors including:

• • Payment History – a record of your payments on each credit account and whether they were on time or late
  • Credit Utilization – the amount of money you currently owe divided by the amount of credit available to you
  • Credit History – includes how long your accounts have been open
  • Credit Mix – how many credit accounts you have and what types of accounts they are e.g. all of your credit cards, lines of credit, car loans
  • Credit Inquiries – this refers to inquiries made into your credit score because of credit applications and not ones done by yourself, an employer or your insurance company, for example

Each of these factors is weighted differently so they each have a different impact on your score. The table below shows the influence of each factor on your credit score as a percentage:

As you can see, your payment history and credit utilization have the biggest impact, accounting for 65% of your credit score.

Things You can do that may Improve your Credit Score and Credit Health

Since your payment history and credit utilization count the most towards your credit score, those are good places to start. 

Obviously making regular, on-time payments is the best way to address your payment history and shows potential creditors that you can responsibly manage your finances. To help ensure your payments are made on time, you can schedule automatic payments through your bank account. Using the calendar on your phone or a physical calendar can also help keep you on top of bills that can’t be auto-payed.

Living within your means is important for your credit utilization ratio and your overall credit health. Writing out a weekly, bi-weekly or monthly budget based on your income is a good way to monitor your spending. When it comes to credit utilization, a good rule of thumb is to use around 30% or less of the credit available to you.

What lenders like to see, and how your credit history can help with your credit score, is a long track record of well-managed accounts. What this means in practical terms is maybe not closing a credit account you’ve paid off and using it occasionally to keep it active – the older, the better.

Instead of having just one line of credit or a credit card with a high limit, having multiple, different accounts, if you’re able to do so, can help with your credit mix profile.

Finally, when it comes to credit inquiries, it’s a good idea not to apply for multiple credit accounts around the same time if they are for different products as this may signal that you are desperate for cash. Shopping around for mortgages is ok and shouldn’t impact your credit score negatively, but it’s probably better to research first before sending in multiple mortgage applications. Multiple credit card applications will negatively affect your credit score.

In Conclusion

Now that you know the basics of what goes into calculating your credit score, you have the tools to work on making it better. Here’s to your credit health! 

If you are thinking about renewing or applying for a mortgage, Fin-Plan can help you in this regard. To ask any question about this article or to book an appointment to look at your particular case, please contact Miklos at nagy@fin-plan.ca. Miklos is a book of business broker, fee-only financial planner, best selling author, finance-related educational course writer, statistician and former Chair of the Canadian Institute of Financial Planners. His Fee-Only financial planning website is at www.fin-plan.ca and his Linkedin page is at: https://www.linkedin.com/in/miklos-nagy-fee-only-financial-planner/.

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Understanding Your Credit Score – Personal Financial Solutions

The views expressed in this material are the opinions of Fin-Plan through the period ended 09/10/2020 and are subject to change based on market and/or other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

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