Credit scores in Canada typically range from 300 to 900. The higher your score, the better your financial standing, and the easier it is to access favorable credit terms. A credit score above 700 is considered good, and above 800 is excellent. Credit scores are calculated using the following five key factors:
- Payment History (35%)
Your payment history is the most significant factor affecting your credit score. It accounts for 35% of your total score. This includes:- On-time payments: Making your payments on time is essential for maintaining a good score. Late payments, especially those more than 30 days overdue, can significantly lower your score.
- Missed payments: Even a single missed payment can negatively impact your score, particularly if it gets reported to the credit bureaus.
- Bankruptcies and collections: Serious financial events such as bankruptcy or having accounts sent to collections can dramatically drop your score and remain on your credit report for years.
- Credit Utilization (30%)
Credit utilization refers to the ratio of your outstanding credit card balances to your credit limit. It accounts for 30% of your credit score. The general rule of thumb is to keep your credit utilization below 30%. Here’s why:- High utilization: If you’re using more than 30% of your available credit, it signals to lenders that you might be relying too much on borrowed money, which can be seen as risky. This can lower your score.
- Low utilization: Keeping your balances low or paying off your cards in full each month demonstrates to lenders that you manage your credit responsibly, positively affecting your score.
- Length of Credit History (15%)
The length of time you’ve had credit accounts for 15% of your score. A longer credit history is generally better for your score because it provides more data to lenders about your borrowing behavior. Factors influencing this include:- Age of your oldest account: The older your accounts, the better, as it shows a longer history of managing credit.
- Average age of your accounts: The average age of all your credit accounts is also taken into consideration. It’s a good idea to avoid opening too many new accounts at once, as this can lower your average account age.
- Types of Credit Used (10%)
The diversity of your credit is worth 10% of your score. Having a mix of different types of credit accounts—such as credit cards, installment loans, and mortgages—demonstrates your ability to handle different types of credit responsibly. This doesn’t mean you should open multiple accounts just for variety, but a healthy mix of credit can help your score. For example:- Credit cards: Revolving credit allows you to borrow up to a limit and carry balances.
- Installment loans: Fixed loans like car loans or mortgages, where you make consistent payments.
- Retail accounts: Store credit cards and other similar credit options.
- Recent Credit Inquiries (10%)
Every time you apply for new credit, a “hard inquiry” is made on your credit report. While these inquiries only account for 10% of your score, too many recent inquiries in a short period can negatively affect your score. Here’s why:- Multiple inquiries: If you’re applying for several credit cards, loans, or other credit products within a short span of time, it can appear as if you’re financially unstable, potentially lowering your score.
- Soft inquiries: These are credit checks that don’t affect your score, such as when you check your own credit or when companies check your credit for pre-approval offers.