What Goes into a Credit Score?

June 1, 2017

According to a recent report, Canadians owe more than 168% of their disposable income. Despite record highs in household borrowing, many Canadians don’t understand the full implications of owning multiple credit products and how their behaviour around debt can affect their credit score.

What is a Credit Score?  

A credit score is a three-digit number, between 300 and 900, that assesses an individual’s credit worthiness. The number is generated by a statistical formula that takes into account a person’s borrowing history. In Canada, there are two credit-monitoring firms (TransUnion and Equifax) that track and provide lenders with this information so that they can evaluate the probability that a person repays his or her debts.


What are the factors that make up a credit score?

A credit score is comprised of 5 factors:

  1. Payment History: 35% of your score takes into account how consistently you make your debt payments. Missing minimum payments will affect your score negatively.
  2. Credit Utilization: 30% of your credit score is dependent on your level of indebtedness and how much of your total available credit you are using. Maximizing your credit limits gives the impression to creditors that your income may be stretched.
  3. Credit History:15% of your score is dependent on how long you have an account open. The longer the history the better, as it shows you are capable of managing credit responsibly.
  4. Credit mix:10% of your credit score depends on the type of credit you own. Lenders prefer to see secured loans (such as mortgages and car loans) over revolving credit (like credit cards and lines of credit) which tend to be riskier.
  5. Inquiries:10% of your score is effected by how frequently you agree to a “hard credit check.” A hard credit inquiry can occur whenever a lender pulls a report as part of your application for credit. Hard inquiries can affect your score up to 12 months.

How do you improve your score?

  1. Pay bills on time: Utility bills – such as gas, water and hydro – aren’t part of your credit file, but can hurt your score if they get sent to a collection agency. Other bills, such as cellphones and credit cards, hurt your score even when they are not sent to a collection agency.
  2. Consolidate debt: Having multiple credit cards, line of credits, and unsecured debt can adversely affect your credit mix. Consider consolidating debt to the lowest interest rate and closing lower quality debt accounts. This will also help to simplify your life.
  3. Limit inactive credit: Closing a credit card or leaving it inactive may negatively affect your credit history. Consider using the card on a recurring expense and paying it off with an automatic monthly payment. Doing this will improve your credit utilization and payment history, since you will stay far under your limit and make payments on time.

A good credit history is built up over many years, beginning when you apply for your first loan or credit card. However, it doesn’t take long for a negative incident to adversely affect your score. More and more landlords, lenders, and employers are conducting credit reference checks to ensure safe payment and to minimize their risks.  Given the record amount of household debt in Canada, it’s important for consumers to understand their credit status. Periodically check your own credit report , not just to see where you stand, but to ensure it is accurate.


Devin Cattelan.

Investment Advisor

Cattelan Private Wealth Counsel

HollisWealth®, a division of iA Securities Inc.