Whenever you apply for credit – whether it’s a credit card, line of credit, personal loan, car loan or mortgage – a potential lender will turn to the credit bureaus to look at your credit score and history, which will play a major role in the success or failure of your application, as well as the rates and terms you’re offered.
What is a credit score?
Your credit score is a three-digit numerical representation of your credit report that falls between 300 and 900. It’s calculated by the two major credit bureaus in Canada: Equifax and TransUnion. Each credit-scoring bureau uses different criteria for measuring your credit score, weighing your history against a proprietary algorithm. The higher your credit score is, the better position you’re in to get approval for financial products with low interest rates and flexible terms.
What’s the difference between a credit score, a credit rating and a credit report?
Your credit report is a detailed record of your borrowing history. Also known as your credit history, your credit report contains a list of the applications you’ve made for different forms of credit (whether they’ve been approved or not); your repayment history; details of any defaults you may have; and information about the personal and business accounts you hold. It also contains personal information including your name and age, as well as data held on public record, such as bankruptcies.
Your credit score is a numerical representation of your creditworthiness based off your credit report. Your score determines your credit rating which could be “poor”, “fair”, “good”, “very good” or “excellent”. Your credit score is calculated by credit bureaus using the information on your credit file and is a number between 300 and 900. The higher your credit score, the lower your risk as a borrower.
What are the credit score tiers and ranges?
There is no single, definitive credit score for an individual – credit scores differ slightly depending on the bureau, which means your Equifax score will probably be slightly different from your TransUnion credit score. While not set in stone, the general credit tiers are:
What factors make up a credit score – and how is it calculated?
The two main credit bureaus in Canada – Equifax and TransUnion – use different algorithms to calculate your credit score. Not only does this mean your credit score will differ slightly depending on which bureau you check, it also means that each bureau weighs factors differently to calculate your credit score. Here are the five main factors that make up your credit score:
Payment history. Your payment history demonstrates how you have repaid the credit that you’ve borrowed – whether that’s on time and in full, late, in partial payments, etc. Lenders will also report the number and type of credit accounts that you have. Having a variety of different types of credit accounts can be helpful – such as credit cards, loans, mortgages, etc. Your payment history makes up around 35% of your credit score.
Credit utilization ratio. This is the amount of credit you’re using compared to the total amount of credit available to you. Running your balances up to your credit limit, or even over 40% of your available credit limit, can negatively affect your score. Try to keep your credit utilization ratio around 30% or less. Your credit utilization ratio makes up around 30% of your credit score.
Credit history. This is the length of time that you’ve had your accounts open for, and can affect your credit score for better or for worse. The longer you have accounts open, such as credit cards or lines of credit, the more positively your credit score will be impacted. Your credit history makes up around 15% of your credit score.
Public records. Declaring bankruptcy or having a collections agency come after you will damage your score. Public records make up around 10% of your credit score.
Recent inquiries. Applying for new credit means a lender will likely conduct a hard pull on your credit report to determine whether or not you’re a good candidate for borrowing money. But doing a hard pull means your credit score will take a temporary dip. A few recent inquiries on your credit report can raise red flags with lenders since it looks like you’re trying desperately to access a lot of credit at one time. Inquiries make up around 10% of your credit score.
How is my credit score calculated?
Not all factors contribute equally to determine your credit score. Here’s how each factor weighs up:
Payment history: 35%
Credit utilization ratio: 30%
Credit history: 15%
Public records: 10%
Inquiries: 10%
Five mistakes that can affect your credit score
Avoid these five common credit mistakes that could potentially bring down your credit score:
Having a credit utilization ratio of 30% or more.
Missing or making late payments.
Closing old credit accounts that have reported healthy activity to the credit bureaus.
Not taking the time to monitor both of your credit reports for inaccuracies.
Applying for too many credit products at one time.
What is – and isn’t – included in your credit file:
There are many details listed on your credit history, which help lenders determine how high or low risk of a borrower you are. However, you’ll be happy to know that not every detail of your life is there for show.
Find out what lenders can and can’t see when studying your credit file.
Included
Name, address and date of birth.
Social Insurance Number (SIN).
Employment information.
Past credit applications.
Credit repayment history, including late or missed payments.
Your existing debt.
Any joint credit cards or loans.
Bankruptcies or other court judgements against you related to credit.
Accounts turned over to collections agencies.
Current account turnover.
Not included
Information about race, colour or religion.
Criminal charges not resulting in a conviction.
Criminal charges older than seven years.
Missing or late rent payments.
Credit information older than six years (unless it’s a bankruptcy).
Health information.
What are letter ratings on a credit report?
Letter ratings are used to describe the type of credit borrowed.
Letter
Meaning
Description
Example
I
Installment loan
Money borrowed for a specific period of time, where you make regular payments in fixed amounts until the loan is paid off.
Car loan or personal loan
O
Open credit
You can borrow money when you need it, up to a certain amount.
Line of credit
R
Revolving or recurring credit
You can borrow money when you need it, up to your credit limit, on a recurring basis. Your repayments will vary depending on how much you borrow.
Credit card
M
Mortgage loan
Details of your mortgage may be included on your credit report. Repayments will vary depending on your mortgage type and interest rate type.
It'll take time to improve your credit history – it won't change overnight. Start by looking at your credit report to see if there are any errors. If there are, you can contact the credit bureau to set the record straight.
To improve your score, make regular, on-time payments to your existing debt (e.g. loans and credit cards) and try not to make numerous applications for credit (successful or not) within a short space of time.
A credit utilization ratio compares the amount of credit you owe to the amount of credit you have access to. Let's say you have two credit cards with a limit of $5,000 each. If you spend $1,000 on both cards, that means you have spent $2,000 out of your available $10,000. Your credit utilization ratio – which is displayed as a percentage – would be 20%, which is well under the recommended limit of 30%.
No, not if you go through a credit bureau or agency that does a soft pull on your score. Your credit file will be accessed by the bureau or authorized agency and your score will be delivered directly to you. But if a company does a hard pull on your credit report in order to tell you what your score is, your score will temporarily drop.
The "magic number" is said to be 650 – a credit score higher than 650 is regarded as being in the "good", "very good" or "excellent" range, while anything under 650 is regarded as "fair" or "poor". For more, read our guide on what makes up a good credit score.
No. While you should use your credit card regularly to show you can responsibly manage a line of credit, you should try to repay the balance in full at the end of the billing cycle in order to avoid extra interest charges.
No. Some people think that once you get married you have a joint score with your spouse — this is a common credit myth. You will always have an individual credit score, however having a joint credit card, mortgage, loan or any other type of credit with your spouse can affect both of your personal credit scores – for better or for worse.
Emma Balmforth is a producer at Finder. She is passionate about helping people make financial decisions that will benefit them now and in the future. She has written for a variety of publications including World Nomads, Trek Effect and Uncharted. Emma has a degree in Business and Psychology from the University of Waterloo. She enjoys backpacking, reading and taking long hikes and road trips with her adventurous dog. See full bio
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