What affects your credit score in Canada? And what doesn’t.
Author: Maria Smith
Having good credit can impact your ability to borrow money as well as the terms of any loan you may have access to. But there are many misconceptions out there as to what does and does not impact your score. Keep reading to find out 5 factors that affect your credit score in Canada and 5 factors that don't.
What is a credit score?
Credit scores are numbers that lenders use to determine your creditworthiness. They are numerical representations of everything in your credit report.
High credit scores signal to lenders that the borrower is likely to repay their loans within the provided terms. The higher your number, the more likely your loan will be approved, as some lenders may have minimum credit score requirements. And the more likely you are to get favourable terms for the loan, including a lower interest rate, than someone with a lower score.
Your credit score may also slightly differ by reporting agency (such as Transunion and Equifax) or by the lender, as each will have its own proprietary way of calculating your specific number.
5 factors that affect your credit score
Credit scores are calculated based on 5 primary factors: payment history, amount of debt (credit utilization), credit history, number of inquiries, and public reports or credit diversity. Each plays a role in determining your credit score, with some factors carrying more weight than others.
Payment history – Do you carry an unpaid balance or miss payments?
Your payment history typically has the most significant impact on credit scores. Carrying credit card balances or regularly missing payments may decrease your score.
To positively impact your score, make sure never to miss a loan or credit card payment (even if you are just able to make the minimum payment). And try not to carry a balance on your credit card if you can avoid it.
Credit utilization – How much outstanding debt do you have?
Your credit utilization is a ratio that includes the amount of debt you have access to and the amount you are currently using. Maxing out all your available credit is not a good signal to lenders.
A good practice is to keep your balances low by trying to avoid borrowing up to your credit limits on things like revolving loans and credit cards.
The higher your debt, the lower your score may be.
Credit history – How long have you had the credit?
How long you've had a particular type of credit and how long it has been on your credit report can impact your credit score. The longer you've had a specific loan or source of credit, the more positively it can impact your score, as long as you are in good standing with that particular credit source.
Lenders want to see that you have a history of being able to pay your loans. If all of the entries on your report are recent, there is no way for a lender to see that you will be able to pay off your loans in the long term.
Before you cancel an old credit card, make sure that it isn't your oldest source of credit. Because if it is, canceling that card may decrease your score.
Number of inquiries – How many recent credit applications and inquiries?
Lenders want assurance that you will be able to repay any credit they advance to you. If you have many recent applications (or credit checks) and inquiries, you appear to be a greater risk to a lender.
Try to avoid applying for multiple sources of credit over a short time. Doing so can negatively affect your score.
Public reports or credit diversity – What are your types of credit?
The final factor that affects credit scores is either credit diversity (types of credit) or public reports (such as bankruptcies and insolvencies), depending on the lender or reporting agency.
It is best to avoid having public reports on your credit report as these will negatively impact your credit score.
But having a good mix of types of credit, long-term loans such as a mortgage, and revolving credit such as credit cards can positively impact your score.
5 things that don't affect credit scores
There are a lot of myths out there about what does and does not affect credit scores. The following 5 things do not impact credit scores negatively or positively: using your debit card, your income level, checking your own credit report, interest rates, and having an application denied.
Using your debit card
Using your debit card does not involve any type of credit. You are limited to the funds in your account, which prevents you from overspending or missing a payment. If you are trying to increase your credit score, using a debit card won't help. But it also won't decrease your score either.
Your income level
Your income level does not impact your credit report or score. But it may affect your borrowing capacity. Lenders use something called a debt service ratio when calculating how much money to lend. The higher your income, the more money you may have access to borrowing.
Checking your own credit report
Checking your own credit report is known as a soft inquiry and does not affect your score in any way. Regularly checking your report for errors or fraud is a sound financial practice. And you can see your information for free from both Transunion and Equifax once a year.
Having a high-interest rate loan
Having high-interest rate loans or credit cards does not directly impact credit scores. But missing a payment on this type of loan can cost you a lot of money in interest charges.
Having a credit application denied
There are many reasons for denying a credit application. Just having it dismissed by a lender does not impact your score.
But you will want to get to the bottom of the reason for your application denial because those specific factors may affect your credit score in Canada.