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What Affects Your Credit Score & Credit Rating

Learn about the 5 factors that are used to determine your credit score.

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5 Key Factors in Calculating and Determining Your Credit Score

A number of specific factors go into determining a credit score. These factors are based on what someone does or doesn't do with the credit they already have available. These factors are the reason why someone's credit score can change frequently. Here are the 5 factors that determine your credit score:

1. Payment History (35% of your score)

Your payment history is the most important factor in your credit score. Creditors want to know if you are going to pay them back the money you are asking to borrow from them.

Your payment history reflects all the payments you make to all of your consumer debts. Creditors report every time you make a payment to your credit cards, line of credit, car loan, personal loan, student loan, cell phone on contract and any other regular debts you have. Mortgage payments are not reflected on a credit report, but almost everything else is.

The payment information that is reported shows separately for each account you have. It shows whether or not you’ve paid as agreed, it shows if it is a deferred payment plan or if payments aren’t currently required (like for a student loan), how many past due payments you have, how often your payments have been late, if you have any debts in collections and if you have any negative information in the public records portion of your credit report (bankruptcy, judgments, liens, etc.).

Your score also reflects how recent any late payments or collection activities are. The older the information gets, the less it will impact your score.

2. How Much is Owed (30% of your score)

When you apply for credit, how much you already owe really matters to a lender. Your current payments will determine if you can manage any more payments in your budget for the additional money you borrow.

While you might think that you can handle more credit, statistically speaking, there’s a chance you might not be able to. If you are close to maxing out all of your credit cards or your line of credit, it means that you are a higher risk to lenders. Higher risk to a lender means that there’s a greater chance that you won’t keep up with your payments.

Another aspect of this part of your credit score reflects how much of your available credit limits you use on an ongoing basis. If you usually use 75% or more of your credit limit on a credit card or line of credit, it will impact your credit score negatively. This is because if something were to happen to your income, and you owe over 75% of what the creditors have lent you, you would find yourself struggling to keep up with payments.


3. Length of Credit History (15% of your score)

If you have had credit available to you for a long time, your credit report should provide an accurate picture of how you use credit and if you had one, how you got through a difficult time. For someone who has not used credit for very long time, it is difficult to tell if they really know how to use credit responsibly.

Good or bad, most information will be automatically removed from someone’s credit report after 6 – 7 years, so the only way to keep a credit report active, is to use credit, at least very minimally, on an ongoing basis.

Time is needed to get a true picture of how responsible someone is with credit. This is why the length of your credit history is the third most important factor in your credit score calculation.

Your score will reflect how long it has been since you first obtained credit, how long each item on your credit report has been reporting and whether or not you are actively using credit right now.

If you have recently obtained credit for the first time, your credit score will not be very strong. However, if you have been using credit responsibly for many years, this factor can work in your favour.

If you have been involved in a bankruptcy, consumer proposal, orderly payment of debt or debt management program, your credit history will essentially restart whenever you complete your program.


4. New Credit Applications (10% of your score)

Frequently applying for new credit can signal financial difficulty. In the industry it’s called “credit shopping” and it does not reflect favourably on someone’s credit score.

It is not unreasonable for a creditor to worry about how often someone applies for new/more credit because the more new credit someone gets, the harder it becomes for them to keep up with all of their payments.

This part of your credit score takes into account the number of times your credit has been checked in the last 5 years, the number of credit accounts you have recently opened, how much time has passed since you opened any new accounts and the time since your most recent credit inquiries. This part of your credit score will also evaluate whether or not you are re-establishing your credit history following past payment problems.


5. Types of Credit Used (10% of your score)

Even though this part of your credit score makes up 10% of the total, it is the least significant part, unless you don’t have much other information on your credit report.

Different types of credit shed light on how you handle your money overall. For example, deferred interest or payment plans can indicate that you aren’t able to save up for purchases ahead of time. Consolidation loans mean that you’ve had difficulty paying your debts in the past. A line of credit is a revolving form of credit, like a credit card, and it’s easier to get into trouble with a revolving form of credit than with an installment loan where you make payments for a set amount of years and then it’s paid in full.

If you focus on managing your finances wisely and only apply for credit as you need it, this part of your score should take care of itself.

More Helpful Information

Other Factors

The factors outlined above are calculated slightly differently by the two credit bureau companies in Canada, Equifax and TransUnion, and it is up to each lender to decide how they interpret and use credit scores and credit report information.

As such, the factors above are not the only things that are important when you apply for credit. Lenders will also consider factors such as your income, your assets, how long you have been at your job and the reason why you are applying for credit.


How to Try and Get Your Credit Score

If you would like to find out your credit score, here's how you can try to get it:

  1. To get your real, actual credit score, you'll need a lender such as your bank or credit union to "pull" it and let you know what it is. Not all lenders will do this, but some will. You just need to ask. The best time to do this is when you're applying for credit or opening a bank account. When they pull your credit score, this will count as a "hard hit" on your credit report, but don't worry, it usually takes at least several enquiries like this per year to begin to slightly impact your score.
  2. To get an estimate of your credit score, you can pay either of the credit reporting companies, Equifax or TransUnion, or you can get a company such as Credit Karma to give your credit score to your for free (they pay for it but make money by getting you to agree to allow them and other companies to advertise to you). We don't endorse any of these options, we're just letting you know what they are. Your credit score with Equifax and TransUnion should be similar, but can differ a little as it's possible that some financial insitutions may report to one credit bureau and not the other. Please also be aware that the score you get from any of these place is not your actual credit score. It's only an estimate generated by a different algorithm - not the real credit score generating algorithm that banks and credit unions have access to.
  3. You can also get a free estimate of your credit score by trying this credit score estimator tool. It seems to do a fairly good job - and it's free! What's also nice about it is you can try playing with information and seeing how different scenarios can impact your score.

How to Get Your Credit Report

You are entitled to have a free copy of your credit report mailed to you once a year. You can also pay for an instant copy too. Find out how both these options work. It is important to have a look at your credit report every once in a while to make sure that there are no inaccuracies and that no one has applied for credit in your name without your permission.

How to Get Help to Improve Your Credit Score

counsellor-helping-with-debt.jpgNormally, the best things you can do to improve your credit score are to manage your money wisely using a realistic spending plan and deal with your debts. If you need help with either of these things, you can speak with one of our Credit Counsellors either in person or over the phone. They can help you go over your situation, put together a budget, look at all your options, and then put together a plan to help you get your finances and credit back on track as soon as possible. Speaking with our Counsellors is always free, completely confidential, and non-judgmental. We’re simply here to help you. Give us a call at 1-855-232-4888.


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