What Affects Your Credit Score?

Every Canadian should know their credit score – especially now that you can get a Borrowell free credit score!

With credit card travel hacking, there's often talk about not applying for too many cards in that it will affect your credit score.  If your credit score takes too much of a hit, lenders will have more difficulty lending you money (such as to buy a home, or obtain a loan for a car).  This is bad news for credit card churners like me, but not too big a deal in the grand scheme of things (for me, anyway) as I can pay off my mortgage if I wanted to and don't need money for a car loan anytime soon.

Know Where The Credit Score You Want

It helps to know the credit score numbers and lingo so that you know where you want to be.  According to the Financial Consumer Agency of Canada, the range is anywhere from 300 to 900 and the credit reporting agencies in Canada are Transunion and Equinox.  A perfect credit score is 900.  Anything under 620 is a no-go zone.  A score of 700 and up is considered good.  The last time I knew of my credit score was when I applied for a mortgage (I think that was around 4-5 years ago).  I was in the mid-700 range, and I think my ex (whom I applied for the mortgage together with) had a higher number than me and I was astounded.  He often paid his bills late because he would forget.  Then I remembered that I like to apply for credit cards to test them out to see if I like them.

What Makes the Credit Score Higher or Lower?

According to Global News, there are 5 factors that affect the credit score.  They are broken down as follows:

• Payment History (35%)– If you're late on your bills, this makes the credit score lower.  If you're under 30 days late, it might not end up getting reported to Transunion or Equifax, but anything over 30 days is fair game.  The payment history takes everything into account, such as credit card payments, cell phone bills, car loans… everything.
• Utilization (30%)- Let's say that you have a card with a $10,000 limit.  If you always spent $8000 a month and paid it off every month, it might still lower your credit score.  Moneysense states that you should aim to keep your utilization under 50%.  So if you have $10,000 available to you, try and only use $5000 or less.
• History (15%)- The longer you have a credit card, the better.  Even better is if you never have a balance on this longstanding card.  That's why I always have my MBNA World Points World card, it's my staple and I will never cancel it since it's a no-annual-fee credit card.  Having a longstanding account with a company is also helpful- such as a cell phone bill with Telus.
• Credit Product Type (10%)- A credit card has more weight than a mortgage because there's more risk with a credit card.  You can max out your credit card in one easy swoop whereas something like a mortgage or car payment is consistent with a predetermined amount.
• Inquiries (10%)- Lastly, the one that we are all warned about when we apply for pre-approved mortgages.  When a lender makes an inquiry, your credit score does take a hit.  However, it is a good idea to check your credit score before you make a big leap or big purchase and when you check your own credit score, it doesn't take a hit.

How to Improve your Score

Now that we know what affects the credit score, and now that we are panicking and feeling insecure about what our number is, it might be a good idea to check-in and think about how to improve your credit score if need be.  The Government of Canada recommends that you:

• Limit the number of credit card applications you make.  When you have multiple checks and applications in a short period of time, this reflects poorly on your credit score.
• Pay off your debt as soon as possible.
• Build the credit history.  Contrary to popular belief, getting a credit card is good because it shows people how responsible you are with money.  If you don't have a credit card, it is more difficult to get a credit history.

There it is, hope this helps you understand what goes into a credit report and what you can do the boost the number.

Readers, do you know your Borrowell credit report and score number?