About the time December rolls around, many of us begin reflecting on the past 11 months. And in 2018, some hot topics for Canadians clearly emerged. For example, learning how to “floss” (if you’ve got kids, you’ve likely already attempted this new dance craze), embracing edible bugs (Loblaw’s will soon be stocking their shelves with these high-protein munchies), and of course, the ups and downs of our credit scores. While I can’t make you a better dancer or force you to add bugs to your diet, my hope is that this blog will clear up a few misconceptions about credit scores.
5 Factors Affecting Credit Scores
A credit score is a three-digit number ranging from 300-900. Credit bureaus use a multitude of information to calculate scores, while banks and other lenders use this information to get an idea of how risky it may be to loan money to an applicant. According to Equifax, a combination of five factors determines whether you will have a low or high score, and they each make up a different portion of your total credit score: your payment history, credit utilization, length of credit history, credit diversity, and number of hard inquiries.
How important is payment history when calculating credit scores?
Your past payment history represents about 35% of your score, making it the most influential item. Have you paid your credit cards, car loan, mortgage, and cell phone bills on time? Any missed, late, or partial payments may show up on your credit report and drop your score. It’s also the number one indicator to creditors that you may be a credit risk. (After all, if you haven’t kept current in the past, there’s no reason for them to think you’ll stay current with new credit payments.) Paying bills on time is the number one way to improve your credit score, hands down.
How does credit utilization impact credit scores?
Your credit utilization makes up about 30% of your credit score. How much unsecured credit do you currently owe compared to available credit? If your cards are maxed out, this will surely bring down your score as it is a warning sign to new creditors. Try to bring down your balances in order to begin restoring your credit score.
Is the length of credit history important?
The length of your credit history is worth about 15% of the calculation weight. An older file that has been open for years is more reliable to use in predicting behaviour than a brand new file that was recently opened.
Is it important to have diversity of credit to improve your credit score?
The type of credit products you have on your credit report makes up about 10% of your score. A credit card payment that is made regularly will help maintain or rebuild your credit much more quickly than a cell phone bill or an auto loan.
Do hard inquiries hurt your credit score?
Hard inquiries make up the last 10% of your credit score. A hard inquiry is when a bank or other lender checks your credit report, usually when you apply for new credit. If suddenly there are a large number of hard hits to your report, creditors will wonder why you are applying to so many institutions at once. In contrast, despite what you may have heard, ordering your own report will not hurt your credit; this is considered a soft inquiry and there are no negative consequences—so, order away! It’s a good idea to regularly check your report to be sure there are no errors needing correction.
How do I get a copy of my credit report?
The two credit bureaus in Canada where you can order your credit report and/or score are Equifax and TransUnion. The report is free if you go in-person with photo ID to the Equifax office in Toronto (at 5700 Yonge Street, near Finch station) or it can be ordered by phone by calling 1.800.465.7166. You should also contact TransUnion at 1.866.525.0262, as information may differ between the two credit bureaus and their credit reports. Any online requests will have fees, as will requesting your three-digit credit score. Credit Canada also offers Credit Building counselling sessions free of charge where we can check your report and score as a first step to dealing with any credit or debt issues.
Get Free Credit Building Help
Credit reports and scores may seem daunting at first, but once you understand how they're calculated and what information is utilized, they can be a helpful tool as you strive for financial wellness. Already have a copy of your credit report and/or score and have questions? Book with one of our certified credit counsellors by calling 1.800.267.2272, or you can book a free Credit Building counselling session with us today!