Having an excellent credit score is the dream of every Canadian. Unfortunately, not everyone knows how to build an excellent one.
But when you understand how your credit score is calculated, you’re more likely to be proactive in managing your credit, which can result in a higher credit score.
Knowing how your credit score is calculated can help you avoid mistakes that can negatively impact you.
With a better understanding of your credit score, you can make informed decisions and take steps to improve your financial stability in Canada.
This article discusses everything you need to know about how a credit score is calculated in Canada including tips on how to improve your score.
Table of Contents
About Credit Score in Canada
A credit score is a numerical representation of an individual’s creditworthiness, which is used by lenders to evaluate their credit risk.
In Canada, credit scores are calculated by credit reporting agencies such as Equifax and TransUnion.
These agencies gather information from various sources, including banks, credit card companies, and other lenders, to create a credit report.
The credit report contains information about an individual’s credit history, including their payment history, debt levels, and other relevant financial information.
The credit score is calculated using a proprietary algorithm that takes into account various factors from the credit report.
A higher credit score indicates that an individual has a lower credit risk, while a lower credit score indicates a higher credit risk.
Below is the expression of Canadian credit score ratings:
| Score | Value |
| 760 – 900 | Excellent |
| 725 – 759 | Very Good |
| 660 – 724 | Good |
| 560-659 | Fair |
| 300 – 559 | Poor |
Note that your score ratings can vary between the different credit reporting agencies. So it’s a good idea to check your credit score from both Equifax and TransUnion to get a more accurate picture of your creditworthiness.
You should also keep in mind that credit scores are not static and can change over time. This requires you to understand how your credit score is calculated to improve it at all times.
How Credit Score is Calculated in Canada
As noted earlier, a credit score is calculated using several factors from your credit report.
Below is a comprehensive view of the factors used to calculate your credit score in Canada.
1. Payment History
Payment history accounts for 35% of the total credit score rating. This factor refers to an individual’s bill payment record.
Your payment history includes details about mortgage payments, credit card balances, and other loan payments.
Late payments or missed payments can hurt your credit score, whereas timely payments help to increase your score.
The bottom line is, it is crucial to pay your bills on time to maintain a good credit score.
2. Credit Utilization
Credit utilization is the amount of credit you have used against the amount of credit you have available.
This is one of the most important factors in calculating credit scores in Canada, accounting for 30% of the total rating.
The higher the credit utilization, the lower the credit score will be, and vice versa.
For example, if an individual has a credit limit of $10,000 and they have used $7,000, their credit utilization would be 70%.
This high utilization indicates that the individual is relying heavily on credit, and is considered a riskier borrower by lenders.
To maintain a good credit score, it is recommended to keep credit utilization below 30% of the available credit. This shows that you’re able to manage your credit responsibly.
3. Length of Credit History
The length of your credit history impacts your credit score rating by 15%
This factor considers the length of time you have been using credit and how consistently you used it over the years.
A long and stable credit history can positively impact your credit score as it demonstrates your ability to responsibly handle credit over an extended period.
On the other hand, a short credit history or a lack of credit history can negatively impact your score.
That’s because lenders may view you as a high-risk borrower with no proven track record of handling credit.
In Canada, credit bureaus typically look at the age of your oldest account and the average age of all your accounts to determine the length of your credit history.
4. Credit Mix
Credit mix refers to the variety of credit types in your credit portfolio.
This can include credit cards, personal loans, mortgages, lines of credit, student loans and car loans, among others.
A multiple credit mix shows that an individual can handle different types of credit and repayments, which is viewed positively by credit bureaus.
Note that credit mix only accounts for 10% of a credit score calculation in Canada. So an individual with a multiple credit mix but a high level of debt or late payments may have a lower credit score.
It’s also important to avoid taking too much debt or opening too many credit accounts just for the sake of improving your credit mix.
5. Credit Inquiries
Credit inquiries refer to the times a person’s credit report has been checked by a potential lender, credit card issuer, or creditor.
In Canada, credit inquiries account for 10% of the total weight of credit scores.
Having too many credit inquiries in a short period can be seen as a red flag to potential creditors.
It could indicate that you’re either trying to obtain a large amount of credit or are having trouble paying your debts.
Moreover, credit inquiries are classified as either hard or soft. Hard inquiries — which occur when you apply for credit — can hurt your credit score.
In contrast, soft inquiries — which occur when you check your credit score or a creditor checks your credit report for pre-approval offers — will not hurt your credit score.
It is essential to keep credit inquiries to a minimum, and only apply for credit when necessary.
6 Tips on How to Build Your Credit Score Fast
From the foregoing discussion, you can see how your this is calculated in Canada.
With that, it’s obvious to identify what you need to do to improve your score.
But if you’re not sure how to build your credit score fast in Canada, check out the following:
1. Avoid late payments
The first and most important step in increasing your credit score is to pay your bills on time.
A late payment could hurt your credit score by up to 35%. So paying your bills on time can’t be overemphasized.
This will help build a good payment history and improve your credit score over time.
2. Improve credit utilization ratio
Keeping your credit utilization ratio low will help increase yours fast.
This ratio measures the amount of credit you use compared to your available credit.
If you’re using too much credit, your score may suffer. To improve your ratio, minimize your credit usage and increase your credit balance.
3. Keep all credit accounts open
Keeping your credit accounts open for a long time will help increase your credit score.
This shows that you have a long history of managing credit, which is important to lenders.
4. Use a mix of credit
Using a variety of credit products, such as credit cards, loans, and mortgages, will help you increase your credit score.
This shows that you can handle different types of credit and that you are a responsible borrower.
5. Minimize hard inquiries
Hard inquiries are made when you apply for credit. They can hurt your credit score, so it’s important to minimize them.
This requires you to avoid applying for credit unnecessarily.
6. Monitor your credit score
Keeping track of your credit score will help you understand what is affecting your score and what you can do to improve it.
Regularly checking your score will help you stay on top of changes and make informed decisions to increase your score.
You can monitor your credit score for free through Equifax, TransUnion, Borrowell, Mogo, or Credit Karma.
READ ALSO: The Best Credit Score Monitoring Services in Canada
Final Thoughts
Credit scores in Canada are calculated by taking into consideration your payment history, credit utilization, length of credit history, types of credit used and credit inquiries.
Credit bureaus such as Equifax and TransUnion use this information to generate a score that represents your creditworthiness.
It’s important to understand your credit score and how it’s calculated to take steps to maintain or improve it.
Also, it is important to regularly check your credit report to ensure accuracy and address any issues promptly.
By taking control of your credit score, you can improve your financial situation and have more options when it comes to accessing credit in Canada.
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