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Your credit score can have a big impact on your life, and many people don’t know much about it. Let’s talk about what you need to know and how your credit score is calculated in Canada.
What exactly is a credit score?
Your credit score is a number that helps lenders predict how likely you are to repay future debt. A credit score can be anywhere from 300 to 850 (900 on some scales). Simply put, if you have a high credit score, it will be easier to borrow money and you’ll have lower interest rates.
There are five main factors that go into determining your credit score.
Payment History (35%)
The most important factor is your payment history, which makes up 35% of your score. Lenders want to know if you’ve repaid your debts on time in the past. It’s the easiest way to tell if you can be trusted to make your payments on time in the future.
How Much You Currently Owe (30%)
Another key factor is the total amount of debt you currently have. If you already have a lot of debt, it’s harder to take on more. To a lender, it might look like you are overextended and that you will have trouble paying it off.
Your debt-to-credit ratio is also taken into account here, not just the total amount you owe. If you’re close to maxing out your credit cards or line of credit, that will negatively impact your score.
Length of Credit History (15%)
The longer you have used credit, the easier it is for lenders to figure out how likely you are to make your payments on time. For this reason, people with no credit history start with lower credit scores.
New Credit (10%)
Applying for a lot of new credit within a short amount of time can sometimes mean a person is in financial distress. If you can, try to not open a lot of new accounts at the same time.
When you open a new account, the lender makes what is called a “hard inquiry,” which goes on your credit report. Checking your credit score, however, is considered a “soft inquiry” and won’t hurt your score.
Credit Mix (10%)
This aspect of your score deals with the different types of credit you may have. Lenders like to see that you can be trusted to manage different accounts responsibly. If you have a lot of different types of credit, it can improve your score.
Your credit mix shouldn’t affect your score too much, though, if you have a history of making your payments on time. At the end of the day, that’s the best way to keep your credit score in good shape.
In Canada, there are three national credit reporting agencies: TransUnion, Equifax, and Experian. They each determine your score in a slightly different way, but they all follow the same basic guidelines. You are also entitled to a free credit report from each every year, which can help you stay on the right track.
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