Breaking down your credit score - MoneySense

Breaking down your credit score

Know what affects your credit score so you don’t accidentally damage it


I’m a late credit bloomer. I’ve only had my credit card for about a year-and-a-half, but before I signed up my parents drilled tales of misused credit into my head. One thing they taught me early on: don’t mess with your credit score.

It’s just three digits, but it’s arguably one of the most important numbers in your adult life.

It determines how reliable you are when it comes to borrowing money. It affects whether you qualify for a line of credit, for how much and what interest rate you’ll pay when you borrow that money. Maintaining a good credit score can save you thousands of dollars down the road.

In Canada, two credit bureaus, Equifax and Transunion, rank credit scores from a scale of 300 to 900. The higher your number, the better, which means you’re a less risky borrower. To obtain your score, you’ll need to pay a small fee to these bureaus, but if you’re looking for your borrowing and repayment history you can get a free credit report mailed to you.

Both bureaus calculate what’s called your FICO score using a secret mathematical equation created in 1958 by the Fair Isaac Corporation. You won’t have access to the equation, but FICO has shared what factors are considered in calculating your score and how they’re weighted for the general population. Each person has a unique credit report and the weight of each factor may be different for others.

Payment history

How good you are at paying any type of credit on time? Credit bureaus consider any type of loan, from mortgage to credit cards. Payment history looks at whether you’ve made any late payments and how late they were. It also considers bankruptcy declarations and whether or not a debt collector was sent out.

Amount owed

How much money you’ve put on credit affects your score. It doesn’t look good if your credit card limit is $10,000 and you’ve charged $9,000. Scott Hannah, President and CEO of the Credit Counselling Society, suggests keeping your credit balance to less than 50% of your limit or else it may bring down your credit score.

Length of credit history

How long have you had your credit account open? How frequently do you use credit? It’s not good to put too much money on credit, but it also doesn’t help your score when you don’t use it at all.

New credit

How many times have you signed up for a credit card? I’ve only ever signed up for two and use only one. Hannah says that people who ask for help from his organization have as many as seven credit cards, all with active balances. If you’re a new user, don’t go signing up for three or four credit cards at once. To grant you credit, lenders such as credit card companies send an inquiry to the credit bureau for your credit score. If the bureau receives multiple credit inquiries in a short period of time it could bring down your score.

Types of credit used

Where and what type of loans are you getting? Your score is affected by the different types of credit you use such as a credit card, a line of credit or a car loan. Just remember that using more credit doesn’t always been your score will be better.