How Your Credit Score is Calculated in Canada

credit score

Many of us often wonder what exactly affects our credit score and by how much. If you’ve found yourself with a bad credit score, you may be especially concerned with how you got to this point and how to recover. Let’s take a look at how your credit score is calculated.

Payment History
Your payment history is one of the major factors that affect your credit score and is actually the most influential factor in determining your score. In fact, payment history accounts for 30 to 35 per cent of your total credit score.

Payment history considers whether you’ve paid your bills on time, frequency of late or missed payments, and whether you have any accounts that have gone to collections. It also looks at if you’ve ever filed a consumer proposal or for bankruptcy.

Late payments, delinquencies, bankruptcies, civil judgments, liens, and debts that have been turned over to a collection agency all affect your credit rating adversely. A single late payment can remain on your account for up to seven years! However, if a payment is made within 30 days past due, it usually has no effect on your score. Your most recent payment history carries the most weight with creditors.

Existing Debts
The main reason we all need a good credit score is to ensure we can get a loan if we need one. Lenders often look at how much debt you have before handing you more money. If your credit utilization (a ratio obtained by dividing the amount of debts by your credit limits) is high, you’re not likely to qualify. The higher your credit utilization, the lower your credit score will be. Ideally, your credit card balances should be less than 35 per cent of your credit limit. The higher your debt is, the greater borrowing risk you represent to lenders. Existing debt levels make up about 30 per cent of your overall score.

Duration of Credit History
Lenders prefer borrowers to have a long credit history because it gives them more information about how you spend your money. At times, it may work to your advantage to leave accounts open. The length of your credit history accounts for about 15 per cent of your total score.

Inquiries for Credit
It may seem unfair, but each time you file an application for a loan, it affects your credit score. Too many inquiries may give creditors the impression that you are either in financial trouble or are taking out too many loans. All inquiries made within a year are considered in the calculation of your credit score. Inquiries account for around 10 per cent of your total score.

Mix of Credit Types
Having a good mix of different types of credit in your records is favourable for your credit score. Credit is mainly categorized into revolving accounts (credit cards) and instalment accounts (mortgage, car loans, etc.). To have a higher score, you must have a careful balance of both types of accounts. This mix of credit types accounts for 10 per cent of your total score.

The two most important things you must pay attention to if you want to build and maintain a good credit score are your payment history and existing debts. If you make all your payments on time and keep your debts low, then your score will automatically go up. To find a more complete breakdown of your score, go to the Equifax website, which is one of most widely used scoring models.

If you need help fixing your credit, contact us today for a free consultation.

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