• Dave Fullerton

Factors that Affect Credit Score

Updated: Sep 15

How do credit bureaus decide your credit score? The main factors that affect your credit scores include your payment history, variety of credit types, credit utilization, length of credit history and credit inquiries.


When applying for more credit, it's important to remember that the financial institution will check your scores as criteria. If the lender is uncomfortable giving money or providing at a high-interest rate, this won't go anywhere.


Confused about what a good credit score is? Refer to our blog post about what makes a good credit score.


Your score affects everything from getting an apartment, a job, or when you apply for insurance in some provinces.


While credit scores can look slightly different depending on which bureau it’s pulled from (Equifax or TransUnion), both use the same factors to determine the score.


Here's what you need to know about each so your credit rating doesn't suffer.


1. Your Payment History

Heather Battison, former vice president at TransUnion, claims, “The most important factor in building and maintaining your scores is to pay your bills on time because it shows lenders your ability to manage credit responsibly.”


Your credit scores are a measuring stick for how likely you can repay loans responsibly. If bad marks appear on your report, it could hurt the chances of getting approved in future mortgage applications.


Suppose you think you can’t pay a bill on time. In that case, the Financial Consumer Agency of Canada (FCAC) suggests contacting your lender to make a special repayment arrangement.


2. The Types of Credit You Have

The more types of credit you have, the better! That is because lenders and creditors want to see that your financial history includes strong management. The FCAC has found this trend consistent across all age groups in Canada, so it's no surprise they recommend having access to not just one type of credit or loans but many different kinds.


Common types of credit accounts include:

  • Credit cards

  • Mortgages

  • Auto loans

  • Student loans

According to the FCAC, a mix of credit accounts may help you achieve higher credit scores — however, it’s strongly recommended that you only open needed accounts and make full, on-time payments.


3. Your Use of Available Credit

Along with ensuring you make your payments, make sure you are using what's available, known as credit utilization.


To calculate credit utilization, add up the balances of all your accounts and divide by your total available credit. For example, if you are currently using $2,000 of your $10,000 limit, you would divide $2,000 by $10,000, multiply that figure by 100 and find you’re using 20% of your available credit.


In Canada, your goal is to keep this number under 35%. Above this could hurt your credit scores and ability to borrow more money.


“If your credit utilization is low, it’s an indication that you’re a responsible spender and can appropriately manage your debt,” Battison says. “Conversely, if your credit utilization is high, you can appear risky to lenders who may question your ability to pay back your loans.”


4. The Length of Your Credit History

The longer you’ve had an account open (and use it), the more this may help your credit health. Closing old accounts can damage or even destroy all that hard work!


Closing an account can hurt your scores if doing so means you’ll be using more than 35% of what’s available of your leftover credit or if it means you have fewer types of credit (credit cards, loans, line of credit, etc.) available to you.


Consider closing or freezing this card when you have an old credit account that costs more than it’s worth.


5. The Number of Inquiries in Your Report

It can be a tough pill to swallow, but it is what it means. Whenever you apply for new credit accounts in rapid succession (or even just once), the lender checks your report, thus triggering a hard-hit inquiry.


A hard hit inquiry (referred to as a hard inquiry) is a credit check recorded in your report, which is seen in the future. Examples of hard hits are credit card and loan applications and some rental and employment applications.


In comparison, when you check your score, known as a soft hit inquiry, it isn’t recorded in your report and won’t affect scores.


In summary, if you’ve applied for credit multiple times in a short period, it can damage your score. Therefore, it’s important to only apply for credit when necessary.


The exception is if you’re shopping around for the best rates on a car loan or mortgage and have multiple hard hits within two weeks. These will be treated as one inquiry into your credit scores, which won’t significantly impact your score.


The Bottom Line

Your credit scores are essential, and we want to ensure you understand how they’re determined. The main factors that affect your credit score include your payment history, variety of credit, utilization, length of history and inquiries. Shopping for a mortgage and worried about your credit score? Make an appointment with us – our team is here to help!