The complete guide to understanding your credit score

KEY TAKEAWAYS:

✔ A credit score is an important factor that lenders use to determine if you qualify for credit, like loans, credit cards, or lines of credit.

✔ Five elements are used to determine your credit score – your payment history, credit utilization, credit history, credit mix, and the number of credit inquiries by lenders.

✔ You have the power to impact your credit score by focusing on money habits that can improve it, not damage it.

It’s frustrating to hear that you’ve been turned down for a loan, a credit card, or a rental application because of your credit score. And it can be shocking to learn how a simple three-digit number can greatly impact your ability to get credit.

What is a credit score

Your score is a three-digit number between 300 and 900, the higher the score, the better. A good score is anything greater than 680. Your score is based on information banks and payment companies share with organizations called “credit bureaus.” There are two bureaus in Canada, and each uses the same information when calculating your score. With your permission, any lender can contact one of these bureaus and ask them to generate a credit report that includes your score based on your credit history.
 
Learn more about credit reports, what they include, and how to get yours for free.

Why your score matters

Banks, other lenders, and landlords don’t always know much about the people who come to them to borrow money, take out a credit card, or rent an apartment. They need a fair way to assess the risk of lending money to someone who may or may not be able to pay it back. And that’s where your credit score comes in. A high score is a good indication that you’ll be able to pay them back or not miss rent payments. 

The 4 parts of your credit score

Credit scores are constantly changing based on how well you’re managing debt. Your score is based on a combination of these parts:

Your payment history

Late and missed payments have the biggest effect on your credit score. Try to make at least the minimum payment before the deadline. 

Credit utilization rate (CUR)

The CUR is the ratio between how much you’ve used and your available credit. Financial experts suggest that 30% is the ideal ratio. So, if you have a $6,000 limit, try to use no more than $2,000 at any time.

Credit mix

Having a mix of various types of credit, such as credit cards, loans, or lines of credit, indicates that you are good at managing your debts.

Credit checks

Applying for credit too often can lower your score because it suggests you may be financially struggling. Learn more about credit checks.

Good money habits that improve your score

Your score captures a financial picture of you at a point in time. It doesn’t mean that it will stay the same. Your score can be improved by practicing good money habits like:

1. Pay more than the minimum on credit card bills.
2. Always pay bills and rent on time.
3. Keep only as much credit as you need and have different types of credit.
4. Keep your balances low.
5. Build a strong track record.

All of these topics are covered in detail in this 4-minute read.

Money mistakes that can damage your score

Some of the things that will lower your score are obvious, like missing payments and paying bills late. But here are the lesser-known ways you can end up with a low score and many myths about credit in Canada.

Here are three things that can harm your credit:  

Not having any credit

If you’ve never borrowed money or used a credit card, you won’t have any credit history. This means lenders will not know if you’re financially responsible enough to have credit.  One way to improve your credit score without a credit history is to take out a loan and pay it off. 

Having too little credit

Credit bureaus look at the types of credit you have in addition to what you owe. Having a variety of credit, such as a personal loan and a credit card, is a good indication that you can manage money well.

Too many hard credit checks

When you apply for credit, the lender contacts one of the credit bureaus and asks it to create a credit report about you. This is called a “hard check”. Too many of these can make it appear that you have a high need for credit, which can lower your score.
 
Maintaining a good credit score throughout your life is worth the effort because it gives you access to credit for the things you need and helps pave the way for lower interest rates.

Need to rebuild or improve your score? We can help.

If you’ve been turned down by a bank because of a low credit score, we can help. We offer personal loans that help you rebuild your credit, and applying will not affect your credit score. Apply today or connect with an easyfinancial representative at one of our 400 branches, or call 1-888-502-3279.

Disclaimer: This content is intended for informational purposes only and does not constitute financial advice on any subject matter.