Paying your bills on time and still struggling with a poor credit score? Got a new credit card and still have a low score? Wondering where you went wrong?
Don’t worry. You’re not alone. Most people are unaware of how credit scores are calculated and what impacts their scores positively (or negatively).
Before we jump into those technicalities, let’s first cover what you should know about credit scores.
What Is Credit Score?
Ever wonder why some people get benefits or lower interest rates when applying for loans while others don’t? Or even why someone’s application for a loan or a new credit card was rejected? The secret lies in their credit score.
Not sure what a credit score is? Credit score ranges from 300 to 850—the higher, the better. Why? Because it is this magical number that allows lending institutions to determine how likely a borrower is to repay their loan terms.
Since different lending institutions, credit unions, and reporting agencies have their own ways of calculating credit scores, it’s crucial to understand the common factors they consider when calculating a credit score.
5 Factors That Control Your Credit Score in Canada
1. What Does Your Payment History Say?
In Canada, your payment history accounts for 35% of your credit score. What does this mean? Late payments on credit card dues or a history of late payments on loans are going to affect your credit score negatively. To keep your credit score in the green, you must make your loan and credit card payments on time.
2. How Well Do You Manage Your Credit?
Credit utilization rate is the percentage of credit you’re using. It makes up for 30% of your credit score. Lending institutions will take note of how much credit you have available and how much of it you’ve used. So what can you do to lower your credit utilization ratio? Pay off whatever you owe on your credit card, especially if you’ve had it maxed out for a long while!
3. How Long Have You Been Paying Off Your Credit?
Your credit history makes up to 15% of your credit score in Canada. What does this mean? Credit history takes into account how long you’ve had a loan (even multiple loans).
Why is this important? The longer you’ve had a loan, the more data a lending institution has about your monthly payment history. This data will help them determine whether or not you make it a habit to pay off what you owe in a timely fashion. So, a long-standing credit account with on-time payments will increase your credit score, whereas a recent entry will not tell the lender much about your repayment abilities. In this situation, the new loan will not increase your credit score.
4. How Often Is A Lender Checking?
When you apply for loans, even credit cards, a lender does a “hard credit check.” If you’ve made multiple loan inquiries (with different lenders), your credit score will fall with each hard credit check. Since the number of inquiries on your credit file makes up to 10% of your credit score, only apply for loans you will qualify for.
5. What About Bankruptcies Or Insolvencies?
Yes, bankruptcies, collection issues, or insolvencies will drag your credit score down. These are a matter of public record and are easily accessible by lenders. Your public records influence up to 10% of your credit score in Canada. So what can you do to rebuild your score? You can request the removal of a negative record on your credit once you’ve solved the payment issue.
Now that you know data lenders and institutions use to calculate your credit score, are you wondering what does not influence your credit score in Canada? Here’s a list to get you started!
Factors That Do Not Influence Your Credit Score in Canada
- Your income level
- Your debit card usage
- Soft inquiries on your own credit report
- A dismissed/denied credit application
- A high-interest rate on a loan or a credit card
Final Thoughts
A credit score could be all that stands between you and the funding that you require for an emergency, your dream home, even an overdue vacation. Take the steps necessary to understand what is dragging your score down and what you can do to rebuild it.
