5 things that impact your credit score

November 17, 2020

You probably know that having a good credit score directly impacts whether your credit card or loan application gets approved. But did you know that your credit score affects more than just your finances? It can also influence your ability to rent an apartment, buy a car, or even get a cell phone. With such far-reaching impact, understanding your credit score is an essential step to improving your overall financial literacy.

What is a credit score? 

In Canada, your credit score is a number between 300-900, which helps determine your overall creditworthiness. This score represents the likelihood that you will pay off your credit card balance or loan on time. The higher your credit score, the more credit-worthy you appear to potential lenders when you apply for credit.

How do credit scores work? 

Your credit score isn’t the only factor that determines your creditworthiness, but it does play an important role when you apply for a new credit card, loan, mortgage, or open a cable or cell phone account. 

Some of the benefits of a high score include lower interest rates, higher credit limits and a better chance that your loan or credit application will be approved. 

How are credit scores calculated? 

Equifax and TransUnion are the two main credit bureaus in Canada. While both agencies use slightly different credit scoring models and algorithms, they weigh the following five factors when calculating your score. 

1. Payment history

Your payment history makes up ~35% of your credit score. This is a record that shows how you have repaid your existing credit. Existing accounts include credit cards, lines of credit, auto loans, student loans, and mortgages, to name a few. 

As far as payment history is concerned, lenders don’t just look at whether or not you make payments on time. They also factor in how late payments are, how much you owe, and how often you miss payments. 

2. Hard credit checks

There are two types of inquiries that get logged anytime your credit file is accessed. They are called hard inquiries and soft inquiries. 

Only hard inquiries impact your credit score, although not as much as you might think. These get logged when you are actively seeking credit, like when you apply for a new card or line of credit. Although this might sound scary, not to worry! Hard inquiries only really impact your score if multiple are made over a short period of time. 

The good news is that while hard inquiries can stay on your credit report for up to 3 years, they only affect your score for a maximum of 12 months. 

A hard credit check has a very limited impact on your credit score, typically around five points. Unless you have multiple hard inquiries in a short period of time, your ability to get credit is generally not impacted.

Hard inquiries are also ‘de-duped’ so that if you’re shopping around for credit (e.g. rate shopping for a mortgage) it will be treated as 1 hard inquiry within the scoring systems, not multiple.

Soft inquiries include requests made by creditors to pre-qualify you for credit, as well as any requests you make for a copy of your credit history. These inquiries, which include the initial check Neo does to determine your potential credit limit and interest rate, do not affect your credit score. 

Inquiries for new credit make up ~10% of your credit score.

3. Credit utilization 

Utilization is a big word, but the meaning is simple: it’s the amount of credit you use versus the total credit available to you. This makes up ~30% of your credit score. Lower utilization rates show lenders that you only use a small amount of your authorized credit. Utilization is important, as lower balances across credit accounts are easier for you to pay off.

4. Credit history

Not to be confused with your payment history, credit history looks at the age of your credit accounts, both new and old. This shows lenders how you have handled credit over time. Your credit history also includes your total debt load and the number of accounts you have. Credit history makes up ~15% of your credit score.

5. Public records

History of bankruptcy, collections issues, or other negative public records can significantly impact your credit score. Although a declaration of bankruptcy can remain on your public record for up to 7 years, you can begin to reestablish your credit by making regular payments on your outstanding loans and credit cards. Your public records make up ~10% of your credit score.

What information does your credit report include?

Your credit report is a summary of your credit history and includes all of the information bureaus use to calculate your credit score, including inquiry information and public records. 

Your report also includes basic identifying information, like your name, address, SIN, and date of birth.

Plus, your report includes a list of your credit accounts also called “tradelines.” The list includes the type of each account, the date you opened it, your credit limit, the account balance and your payment history.

To get a free personal credit report, visit the Government of Canada website for more information.

Ways to improve your credit score

There are many ways you can start improving your credit score, including paying your bills on time, increasing your credit limit on existing accounts and maintaining a good utilization rate across your accounts. 

Making smart choices when it comes to managing your credit is the best way to demonstrate your creditworthiness to potential lenders, as you build and maintain a good score for the future. 

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