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What's In A Number? Credit Scores 101

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November was Financial Literacy Month in Canada, a time for all Canadians to focus on better management of our individual financial goals. Credit plays an important role in living a focused and healthy financial life. Having good credit will help you qualify for a loan, mortgage, or credit card.

If you have credit, you're assigned a credit score, which is a three-digit number between 300 and 900 that measures your creditworthiness. A high score is good whereas a low one is not.

Lenders use your score to determine whether or not they'll lend money to you and landlords will check your score to decide if they'll accept you as a tenant. Also, insurance companies and potential employers will sometimes look at your score.

How your score is calculated

There are two major credit reporting agencies -- Equifax and TransUnion -- that collect information from banks, lenders, internet and mobile phone providers, and other creditors to generate your score. The agencies collect information from these providers about how much you owe on each account, your credit limits, and if you pay your bills on time. This information is then used to create your score.

The agencies have proprietary scoring models and the way they calculate your score is a secret. But there are certain factors that can affect your score more than others:

  • Payment history (35 per cent): Your payment history shows whether or not you pay your bills on time. It also shows if you've declared bankruptcy or had wage garnishments. Negative information stays on your file for up to seven years. The length of time the information remains on your file depends on the province or territory you reside in. You should always pay your credit card bills on time. If you can't, ensure you make the minimum payments.
  • Amount owed (30 per cent): The amount of credit you actually use counts towards your score. Lenders will consider you a higher risk if you use a large percentage of your available credit. Using less than 30 per cent to 35 per cent of your available credit is ideal.
  • Length of credit history (15 per cent): If you've had an account open and have used it for a long period of time, it's good for your score. But if you close your older accounts and your remaining accounts are newer, it could hurt your score. To improve your score, keep older accounts open even if you don't need them. Also, use them occasionally to keep them active.
  • Types of credit (10 per cent): Having one type of credit product may lower your score. It's better to have a variety of credit, such as a credit card, line of credit, and loan. However, you should make sure you can afford to pay back the money you borrow.
  • New credit requests (10 pe cent): When you apply for most types of credit or someone asks for your credit report, it's counted as an inquiry or a hard hit. Having a lot of these in a short period of time could negatively impact your score so you should apply for credit only when you need it. When you're shopping for a mortgage, try to do it in a 14-day period since all inquiries made during this time are often considered as one inquiry. Requesting your own credit score or report is recorded as a soft hit and won't affect your score.
  • What's a good score?

    Having a good credit score can mean the difference between having your credit card application approved or denied, or getting the best mortgage rate. Here's a general guide to credit score ranges:

  • 350 to 559: Poor

  • 560 to 659: Fair

  • 660 to 724: Good

  • 725 to 759: Very good

  • 760 or more: Excellent
  • How to get your credit score

    To get your credit score, you'll often need to pay a small fee to Equifax or TransUnion. But there are some reputable sites in Canada, including RateHub.ca, that allow you to get your score for free with no catch. However, beware of sites that'll give you your score for free but make you sign up for a paid service.

    The bottom line

    Your credit score is one way to measure your financial health. If you have a great score, you should ensure that it doesn't drop by making responsible financial decisions. But if your score is bad, you should take steps to improve it so you can qualify for lower interest rates and save money over the long run.

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