Do you know your credit score?
What is a credit score?
A credit score is a three-digit numerical value, usually between 300 and 900, that is calculated based on the information on your credit report at a particular point in time. If you have any credit accounts, such as credit cards, mortgages or loans, you are likely to have a credit report, which is a record of how you manage your credit obligations. This information is then distilled and calculated to create your credit score. The score balances positive and negative information on your credit report to provide a consistent and objective summary of your credit obligations and payment behaviour, reflected in the form of a credit score. Lenders may use the score, along with other information, to help assess the level of risk associated with extending credit.
Checking it won't lower it.
How do you access your credit score?
- All consumers in Canada are eligible to receive their free credit report, known as a Consumer Disclosure, through TransUnion. See how to request you free Consumer Disclosure here
- If you are a resident of Ontario or Quebec, you are eligible under provincial legislation to receive your credit score at no charge when you request your Consumer Disclosure
- Residents of other provinces currently do not have access to a free score with their Consumer Disclosure, but may be able to check their credit scores through partner programs with financial institutions through banking applications or similar delivery features
- Additionally, consumers may subscribe to TransUnion monitoring services and will receive their credit score as part of this paid subscription
How is my credit score calculated?
The score is a three-digit number that lenders use to help them make decisions. Lenders use scores to determine whether or not to grant credit, and if so, how much credit and at what rate. A higher score indicates that the individual is a lower credit risk.To calculate a score, numerical weights are placed on different aspects of your credit file and a mathematical formula is used to arrive at a final credit score. TransUnion credit scores are calculated using several key factors in your credit history and payment behaviour, including but not limited to:
- Payment history: your track record for repaying your loans and credit obligations; whether you pay your accounts consistently and on time
- Balances on accounts: how much money you currently owe on your credit accounts
- Credit utilization: How much credit you use compared to the amount of credit you have available
- Length of credit history: How long your accounts have been open
- Credit mix: The different types of credit you have (e.g., credit cards, loans)
- Recent activity: How often, and how recently you’ve applied for credit or opened new credit accounts
While the overall purpose of credit scores is universal, each lender will use his or her own criteria to measure an individual’s credit worthiness
It can be confusing when your score seems high, but you are denied credit. Chances are you're not looking at the same score as your bank or finance company, or they had other contributing factors involved in their decision, such as previous history with the institution. Some lenders also use their own internal credit scores when evaluating an application. The only way to find out about how they measure your creditworthiness is to ask the individual lender.
When you apply for credit, like a mortgage, car loan, a new credit card, apply for a job or want to rent an apartment, companies need a way to gauge your credit worthiness. Your credit report includes a record of your financial reliability.
Credit grantors and authorized institutions obtain credit reports about individual consumers. Consumers benefit through faster credit decisions.
What is a good score?
Typically, the higher the score the better. Each lender decides which credit score range it considers a good or poor credit risk. The lender is your best source of information about how your credit score relates to their final credit decision. Your credit score is only one component of the information that lenders use to evaluate credit risks.
What affects my credit score the most?
Your payment history is typically the most important aspect of your credit score. It shows how you’ve managed your finances. Your credit history is also very important, as it demonstrates how long you've been managing your accounts, and any recent changes at the time of the score being generated.
The following behaviours and actions may affect your credit score either positively or negatively:
- Consistently making payments on time, or missing payments
- Increasing or reducing credit card balances
- Applying for new credit or opening new accounts
- Closing existing accounts
- Managing different types of credit responsibly over time
Additionally, certain actions or some information in your credit report would not impact your credit score, including:
- Requests for your credit report made for non‑lending purposes (such as checking your own credit)
- Certain types of inquiries, such as promotional or pre‑approved credit checks, tenancy application checks or employment checks made by prospective employers
- Personal details such as age, ethnicity, religion, marital status, salary, occupation and employer information are not factors in the calculation of your score. The score is a representation of how you manage financial responsibility, not a testament to you as an individual
- Inquiries made by insurance companies: these are considered non-credit related inquiries, or ‘soft’ inquiries, and do not impact your credit sscore
Why you may have mutliple credit scores
You may have multiple credit scores because different scoring models are used for different purposes. These models may weigh factors differently depending on the type of credit being assessed.
Why your score may differ between different credit reporting agencies
Credit scores may differ between consumer reporting agencies in Canada, such as TransUnion and Equifax. This may occur because each agency may have slightly different information about your credit history, and different scoring models may be used to calculate your score.
Managing different types of credit responsibly over time. What is my credit mix?
Your credit mix refers to the different types of credit you hold, such as credit cards, lines of credit and mortgages. In addition to your credit mix, the number of accounts you have also influences your credit score.
Will I be penalized for shopping around for the best interest rate?
A common misconception is that every inquiry decreases your credit score. This is not true. While an inquiry is recorded on your personal credit report every time you, one of your creditors or a potential creditor obtains your credit report, the presence of inquiries has only a small impact on your credit score. Many types of inquiries (such as employment, collection, insurance, rental, your inquiry into your own file and account review inquiries) have absolutely no impact. Most scoring models take appropriate steps to avoid lowering your score because of multiple inquiries that might occur as you shop for the best car or home loan terms.
Understanding Your Credit Score
Determining your score is more complicated than just weighing the different aspects of your credit history. The credit scoring process involves comparing your information to other borrowers that are similar to you. This process considers a tremendous amount of information, and the result is your three-digit credit score number.
Remember, no one has just one credit score, because financial institutions use several scoring methods. For some credit scores, the amount you owe might have a larger impact on your score than payment history.
View all of your credit reports annually to help ensure the information is accurate. You may also want to use a credit monitoring service year-round. TransUnion offers some of the latest and most innovative credit monitoring services, to help you spot inaccuracies, potential fraud and other blemishes that could lead to higher interest rates.
How do I build a good credit history?
A credit reporting agency needs a track record of how you’ve managed credit before it can calculate a credit score. Typically, six months' worth of activity will provide enough information to generate a score. Your score is dynamic and may rise or fall over time, based on how consistently and promptly you pay your bills. Establishing a good credit history takes time. Each creditor has different.requirements for issuing credit. If you are declined credit, contact the lender to determine the reasons why.
Start with a local store or a secured loan
If you have steady income and have used the same mailing address for at least one year, you may wish to apply for credit with a local business or department store, or for a secured loan or credit card through a financial institution. Paying credit obligations on time will help you develop a good credit history and may enable you to obtain additional credit in the future.
Consider a co-signer
If you have problems establishing credit, you may wish to ask a person with established credit to co-sign an application for you. This allows the creditor to base the decision on both of your credit histories. But remember, your co-signer is equally responsible for repayment of the debt. Both parties’ credit reports will reflect the payment history on this type of debt. Once you have proven that you are able to make timely payments, you may wish to apply for credit on your own.
How can I improve my credit score?
Several factors affect your credit score including payment history, amounts you owe, utilization of available credit, length of credit history, new credit and types of credit you use. Here are some tips on how to improve your credit score:
Be punctual
Pay all your bills on time. Late payments, collections and bankruptcies have the greatest negative effect on your credit score.
Check your credit report regularly
Take the necessary steps to remove inaccuracies - Don’t let your credit health suffer due to inaccurate information. If you find an inaccuracy on your credit report, contact the creditor associated with the account or the credit reporting agencies to correct it as soon as possible.
Watch your debt
Keep your account balances below 35% of your available credit. For instance, if you have a credit card with a $1,000 limit, you should try to keep the outstanding balance below $350.
Give yourself time
Time is one of the most significant factors to improve your credit score. Establish a long history of paying your bills on time and using credit responsibly. You may also want to keep the oldest account on your credit file open to lengthen your period of active credit use.
