What is my credit score – and why is it important?
What’s in a number? Understand the importance of your credit score – starting with how to find it.
Your credit score isn’t just a number that helps lenders determine how risky of a borrower you are, it can also affect rental housing applications, interest rates and even your ability to get a cell phone contract.
In this guide, we show you where you can find your credit score and what goes into calculating it.
What is a credit score?
A credit score is a summary of your credit history expressed as a number ranging from 300 to 900. The credit score model is a risk-based system that calculates the possibility of you defaulting on your next loan – the lower your score. The higher your credit score is, the better position you’re in to get approval for financial products with competitive terms.
A few different factors go into creating your credit score, and both of the two main credit bureaus in Canada (Equifax and TransUnion) use different criteria for measuring your score, weighing your financial history against their own algorithm. This results in two slightly different credit scores.
Whenever you make an application for credit (e.g. a mortgage, credit card or personal loan), the lender will turn to the credit bureaus to look at your score and history, which will play a major role in the success or failure of your application, as well as the rates and terms you’re offered. By looking at your credit report in conjunction with its own assessment of your circumstances, the lender will decide the following:
- Whether to lend to you
- How much to lend to you
- How much interest to charge you
- The length of your loan term
What are the credit score tiers and ranges?
While not set in stone, the general credit tiers are as follows:
- Excellent credit score: 800-900
- Very good credit score: 720-799
- Good credit score: 650-719
- Fair credit score: 600-649
- Poor credit score: 300-599
Where can I get a copy of my credit score?
There are a few different ways to get a copy of your credit score – some are free and some cost a small fee.
- Credit score services. There are many free credit score services that require basic personal information to access your credit report. You can find many reputable companies online offering this service, including any in the table above.
- A credit bureau. You can find out your credit score directly from one of the two major credit bureaus: TransUnion or Equifax. You may have to pay a fee to access your score immediately, while ordering a copy via the mail will usually be free of charge.
- Credit counsellors. If you’re in need of financial counselling, credit counsellors can provide you with a copy of your credit report and credit score free of charge.
- Via financial products. Some banks and online lenders will offer credit-building products such as secured credit cards and loans that allow you to access your credit score in order to work on increasing it.
Do you only have one credit score?
You will likely have a slightly different credit score with TransUnion than you do with Equifax. While both credit bureaus are equally important and reputable, one may calculate your score slightly differently from the other, depending on their algorithms. A bureau may weigh specific factors differently than the other bureau, which results in a slightly different credit score.
When you apply for a credit product – whether that’s a mortgage, credit card, loan or line of credit – a lender may check your credit score with either both bureaus or they may check with only one credit bureau. Additionally, lenders may only report your payment information to one bureau, or they may report to both.
One important detail to note is that you’ll always have the same credit file. If there are no errors listed on your file, you shouldn’t expect too big of a discrepancy between your scores.
What makes up your credit score?
Here are the five main factors that make up your credit score:
- Payment history. Your payment history demonstrates how you have repaid the credit that you’ve borrowed – whether that’s on time and in full, late, in partial payments, etc. Lenders will also report the number and type of credit accounts that you have. Having a variety of different types of credit accounts can be helpful – such as credit cards, loans, mortgages, etc. Your payment history makes up around 35% of your credit score.
- Credit utilization ratio. This is the amount of credit you’re using compared to the total amount of credit available to you. Running your balances up to your credit limit, or even over 40% of your available credit limit, can negatively affect your score. Try to keep your credit utilization ratio around 30% or less. Your credit utilization ratio makes up around 30% of your credit score.
- Credit history. This is the length of time that you’ve had your accounts open for, and can affect your credit score for better or for worse. The longer you have accounts open, such as credit cards or lines of credit, the more positively your credit score will be impacted. Your credit history makes up around 15% of your credit score.
- Public records. Declaring bankruptcy or having a collections agency come after you will damage your score. Public records make up around 10% of your credit score.
- Recent inquiries. Applying for new credit means a lender will likely conduct a hard pull on your credit report to determine whether or not you’re a good candidate for borrowing money. But doing a hard pull means your credit score will take a temporary dip. A few recent inquiries on your credit report can raise red flags with lenders since it looks like you’re trying desperately to access a lot of credit at one time. Inquiries make up around 10% of your credit score.
Those three digits can have a big impact on your life – for better or worse – so they’re worth keeping an eye on. Be aware of the factors that influence your score and monitor your credit score carefully – you may just help edge it closer to the 900 mark with a little effort and dedication.
How do I calculate my credit utilization ratio?
Also known as a debt-to-credit ratio, your credit utilization ratio can be calculated as follows:
(all current debts / total amount of credit) x 100 = credit utilization ratio
Lets say you have a credit card with a balance of $100 and a credit limit of $5,000, as well as a line of credit with a balance of $3,000 and a credit limit of $10,000. That means your debts sit at $3,100 and your total amount of credit is $15,000. According to the calculation, your credit utilization ratio would be 20.66%.
($3,100 / $15,000) x 100 = 20.66%
Many money experts recommend that you should keep your credit utilization ratio under 30%.
Common mistakes that hurt your credit score
You probably already know that making late payments or defaulting on a loan is guaranteed to lower your credit score. However, here are some lesser known ways that you can hurt your credit score:
- Applying for multiple credit products at one time. Submitting applications for credit cards or loans requires a lender to do a “hard pull” on your credit score, which can have a negative affect on your credit score – especially if you submit multiple applications in a short period of time.
- Letting your credit card balance get too high. Since your credit card balance directly affects your credit utilization ratio, spending close to your credit limit will increase your ratio. Having a ratio higher than 30% will result in a lower credit score.
- Closing credit accounts. When you close a credit account, the amount of credit available to you goes down – causing your credit utilization ratio to increase. Additionally, closing an old credit account can make your credit history seem shorter than it actually is, lowering your credit score again.
- Renting a car with anything but a credit card. Car rental companies sometimes run a credit check on customers who don’t want to pay with a credit card.
- Not paying parking tickets or other important bills. Those bills don’t just pay themselves. After a while, parking tickets and other bills get sent to collection agencies, which negatively impacts your credit score.
- Signing up for a new phone contract. Phone companies do a hard credit check when you sign up, causing your credit score to take a temporary dip.