Canadians use credit every day. Whether it’s our credit cards, mortgages, car loans, or paying for school, credit is an important part of our lives. But we rarely think about the score that stands behind all this credit. What is a credit score? How is it calculated? And how does it impact our ability to borrow money?
This month we’re taking a closer look at the credit score – that three-digit number that has such a big impact on our financial lives.
What is a credit score?
A credit score is a number calculated by the credit bureaus – either Equifax or TransUnion in Canada – that represents your creditworthiness. This score is used by lenders to decide whether you’re a good candidate for a loan or a credit card. It ranges from 300 to 900 and the higher your score, the more likely you are to be approved for credit. And if you’re applying for a loan, the higher your score, the lower the interest rate you’ll be charged and the less that loan will cost you over time.
We update your credit score every month so you know where you stand. If you haven’t looked at it recently, log in to view your score today.
What goes into a credit score?
Considering how it affects whether you can secure credit and how much that credit may cost you, you can see how important it is to know what goes into your credit score and how you can improve it.
So, what goes into a credit score?
Payment History. Paying your bills on time is THE most important aspect of your credit score. Late or missing payments can signal greater risk to lenders and can impact your credit score for up to 18 months. So set up automatic bill payments when you can to help keep your score healthy.
Credit Utilization. In other words, what percentage of your available credit do you regularly use? Carrying high balances or “maxing out” your credit is another sign of risk to lenders as it shows you may have a problem paying your bills in the future. Generally, the highest credit scores have under 30% utilization, but keeping it under 75% is a good guideline. Use your credit wisely and regularly pay down or pay off your debt.
Credit History. Your credit history is a combination of how long you’ve had credit accounts and how long it’s been since you used them. The longer you’ve had credit, and the more recently you’ve used it, are generally positive factors in your credit score. So, before you cancel any credit cards, think about how that may impact your score. Wiping out years of credit history could end up negatively affecting your ability to get new credit.
Credit Mix. Credit mix refers to the different types of credit you might have: credit cards, car loans, mortgages, etc. You don’t HAVE to have different types of credit to have a good credit score – but it doesn’t hurt.
Credit Inquiries. First, know that there are two types of inquiries: soft inquiries and hard inquiries. Soft inquiries – like when we check your credit score – don’t impact your score. Hard inquiries mean you are applying for new credit and will have a slight impact on your score until the credit bureau has enough history on any new credit lines to reassess your creditworthiness.
Knowing what goes into your credit score is the first step in taking control of your credit. If you haven’t looked at this month’s credit score update, now is a good time to log in to your account and make sure you know where you stand.