What Is a Credit Score and How Is It Calculated?

Everything you need to know about credit score

Credit scores are the foundation of your financial history and future. Credit scores and reports can determine many meaningful opportunities, including if you can buy a house, lease a car, and qualify for loans. While it may seem like an arbitrary number, credit scores are calculated based on a wide range of factors. Understanding these factors will be essential in benefitting from all the opportunities available to you, as well as help you set smart financial goals for the future.

If you’re looking to learn the basics of a credit score and how it’s calculated, you’re in the right place. In this article, we break down the most commonly asked questions regarding credit scores in Canada.

What exactly is a credit score?

A credit score is based on information presented in your credit report. It is calculated based on your transaction and financial history. As such, your credit score changes depending on things such as: if you’ve paid back your debts, how much credit you have, and if you make your payments on time. This number, which ranges from 300 to 900, is then used by lenders to determine if you’ll repay debts in the future. Having a lower score reduces the likelihood of securing loans, and if you can secure credit with a low score, you’ll likely be paying higher interest rates. A better score represents the probability of the lender getting their money back, so it is essential when you’re taking out a mortgage or similar line of credit.

What is a credit report?

A credit report is a summary of your credit score. While your credit score can be viewed on your banking browser or application, it is more of a guesstimate or near approximation of the actual number. Your true credit score can only be found through a credit report which is released by one of Canada’s two major credit bureaus: Equifax and TransUnion. This report will have information on borrowing activity and repayment history.

What are the main factors in calculating a credit score?

Don’t be surprised if you see different credit scores from the two other credit reporting agencies. Each bureau has its own algorithm to arrive at a final rate, and you’ll only need one score to present to a lender. However, many of the metrics used by both bureaus are the same. Let’s examine the main factors affecting your credit score:

  1. Payment history: Your payment history comprises about 35% of your overall score. It essentially tracks the amount of credit you’ve used across various lines of credit, loans, and mortgages. This includes student loans, investment properties, store accounts, and credit cards. Payment history will track how many of your debts you’ve paid back on time against information such as missed or late payments.

  2. Used vs. available credit: Another significant chunk of your credit score revolves around how much credit you’re using each month. It will track whether you’re using all the available credit or if you’ve left a little unused each month.

  3. Credit history: This section of your overall score is based on a timeline of events. It will take into account old and recent reports, cards, and credit so that your lender can gauge how you’ve dealt with money in the past.

  4. Public records: Any accounts of bankruptcy or negative track records go on your public records. This can also impact your credit score by up to 10% however the information regarding a bankruptcy will only stay on your credit history for a particular period of time.

  5. Inquiries: Each time someone “inquires” into your credit history, your overall score is impacted. This can lead to a decline in your score. However, investigations can only be carried out with your permission. Repeated inquiries over a sustained period of time can signal financial difficulties and act as a warning sign.

As you can see, several factors impact your overall score. You should always be aware of your outstanding debts and how close to your credit limit you are as well.

Who can access your credit report?

The Government of Canada has strict mandates about who can view your credit score. Typically, financial institutions, credit card companies, car leasing companies, insurance agencies, and landlords can access your score. These organizations or individuals usually need to access your report for a specific purpose. Or if they are not one of these, with a purpose, your permission would be required. This could be to lend you money, rent to you, offer a credit increase, or give information to a creditor to collect a debt. If you want to obtain your report you will need to provide consent and the credit bureau. You have entitlements to a free report but often the Bureau will require a fee to access your score.

Debt Counselling

Of course, those who have struggled with debt issues in the past might find themselves struggling to bring up their credit score. Debt counselling is a viable option for such individuals, as it paves the way to financial literacy and debt freedom. You’ll learn the basics about consumer proposals, bankruptcies, managing finances, and more.

There are certainly many factors that determine your credit score. These factors are based on how you handle money and how you’ve dealt with lines of credit in the past. It also determines your future and what is accessible to you. An excellent credit score can mean decreased interest, higher credit limits, and more available credit to draw from.

If you need help on how to move forward with your credit score or how to best deal with your debt situation, then debt counselling is the way to go! Navigating rising debt doesn’t need to be stressful when you have a powerful and supportive team behind you. At Kevin Thatcher & Associates, we have years of experience helping individuals like yourself achieve their financial goals.

To learn more about debt counselling, call Kevin Thatcher & Associates at 1-888-702-9801 or contact us here.

Speak to an expert today.