How Is My Credit Score Calculated?

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Credit scores is a way that finance managers use to calculate risk and a person’s financial trustworthiness.

Its current level and your credit history show them whether you are likely to pay your bills and any loans/lines of credit that are made available to you.

Your credit score will weigh a lot in some situations. Whether you want to take a loan, apply for a credit card, or want to rent an apartment, its level can tip the balance one way or another.

Since it’s quite a strong deciding factor in your financial stability, let’s take a closer look at credit scores and see precisely how they are calculated and what each level means.

Credit Score Range in Canada

How exactly does a credit score work? Your credit score is quite fluid and changes all the time. It can go from 300, a low level, to 850 or 900, which is the most attractive level for a lender. The table below will give you a general idea of credit score ranges in Canada.

Every time you borrow money, the lender will communicate all the information regarding your previous lending experiences and how you paid back the money that was lend to you. That’s how other financial institutions can find data regarding your ability to pay your loans on time.

Credit Score Ranges

Poor Fair Good Very Good Excellent
<559 560-659 660-724 725-759 >760

Percentage of Canadians in Each Category

4% 10% 15% 14% 57%

Key Factors Used to Calculate your Credit Score

You cannot know precisely how your credit score will evolve by merely considering your debt awareness and analyzing how quickly you paid back the loans you took. The credit bureau uses specific methods of calculating it, and the formula isn’t made public. Still, these factors are known to play a part in assessing a person’s financial trustworthiness, so you can rely on them to estimate where you stand:

1. Credit Applications and Inquiries

If you tend to apply for new credits often, it’s a sign you don’t manage your finances very well. Borrowing money to often isn’t an advantage when your credit score is calculated. The more loans you have and the higher the amounts you borrowed, the higher the likelihood that you will experience difficulties in paying those loans back. Not paying back your loans or paying them late can lead to poor credit score which will impact your ability to get a line of credit in the future.

It’s also important to keep in mind that every time you apply for credit, bank and direct lenders will make an inquiry. That inquiry will remain in the system and will be a signal for future lenders that you have been struggling financially many times before.

2. Your Payment History

Your credit history is a significant element in calculating your creditworthiness. It includes information about how long you have been borrowing money and how well you managed to reimburse it. The credit bureau will consider many credit types, like all types of loans, credit cards, store accounts, lines of credit, finance company accounts, and any other official way of accessing credit.

If you don’t pay your loans backs on time, your payment history will reflect it and it can lead to bad credit scores. All the relevant collection information will be there. When checking your payment records, the credit bureau also analyzes how many of your credit accounts registered late payments to see how you performed from a broad perspective.

3. Used and Available Credit

This part is connected to your credit cards and lines of credit; it shows what credit you have available and how much of your total credit you normally use. It helps create spending patterns and gives a clear image of the risk you tend to take. Getting too close to your credit limit is a red flag because it means if you happen to lose your income for a while, you won’t be able to cover the payments. In general, using over 60% of your credit limit won’t reflect well into your credit report.

4. Credit Accounts History

This is a way of analyzing your experience dealing with credit from a general perspective. It’s an evaluation of how long you have been borrowing money and how efficiently you have refunded it. Your credit history’s length shows how you manage challenging periods and whether you have a responsible attitude towards your credit balance. Having used credit cards or loans successfully over a long period weighs a lot in assessing your financial awareness and reimbursement strength.

5. Public Records

Public records contain information on any of your debts handled by a collection agency, as well as data on bankruptcy or insolvency. These are elements that can negatively influence your credit report.

6. Types of Credit

This may not be one of the main elements used in calculating your credit score, but it still matters, especially if your credit portfolio isn’t that extended. The type of credit you tend to use more often sheds light on your ability to manage your finances and shows which part you struggle with. If you only turn to credit when it’s absolutely necessary but not forced by a negative turn of events, you have nothing to worry about.

Who Sets your Credit Score?

Canada has two main credit bureaus, Equifax and TransUnion. All the information on how you apply for credit, use it, and reimburse it, goes into their records to be stored and shared when necessary.

That information will only be available for entities having a direct interest in assessing your financial strength, like banks, lenders, landlords, employers, insurance companies, car leasing companies, and a few others.

How Important Is Your Credit Score?

Your credit score is an accurate reflection of your spending habits and your ability to keep your finances under control. Turning to credit is not a bad thing, as long as you don’t exaggerate; what matters is how efficiently you reimburse it. Now that you have a general idea of how your creditworthiness is calculated, you can take measures to keep it at a decent level.

That means you must always make sure to pay on time, at least the minimum amount, not to exceed your credit limit or even get too close to it, and that you don’t apply for new credit unless it’s necessary. But at the same time, try to add length to your credit history because that will improve your overall rating.

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