How is Your Credit Score Calculated in Canada?

Understanding how a credit score is calculated in Canada is essential to your financial health. This three-digit number determines your ability to access loans, credit cards, and even rent an apartment. In Canada, credit scores are primarily determined by two major credit bureaus: Equifax and TransUnion. While they both consider many of the same borrowing behaviours, each uses a slightly different formula to calculate your score. In this article, we will explore the five factors that influence credit score calculations.

Factors Used to Calculate Credit Scores in Canada

1. Payment History: 35%

Your payment history is the most significant factor that affects your credit score. It makes up 35% of your score, meaning late or missed payments have a significant negative impact. To maintain or achieve a higher credit score, always make your payments on time.

2. Credit Utilization Ratio: 30%

Another critical factor that affects your credit score is your credit utilization ratio, which makes up 30% of your credit score. A credit utilization ratio measures the amount of credit you’re using compared to the total credit available to you. The lower the ratio the better. A high utilization ratio signals an overreliance on credit, which negatively impacts your score.

Only revolving credit products, like credit cards and lines of credit, are used to determine your credit utilization ratio. Keeping your credit utilization below 30% is ideal. That means keeping the balances on your revolving credit products under 30% of the credit limit or paying the balances off in full every month.

3. Length of Credit History: 15%

The length of your credit history makes up about 15% of your credit score. A longer credit history can positively influence your score because it provides more data on your borrowing behaviour. This factor analyzes the average age of your credit accounts, including your oldest and newest account.

4. Credit Mix: 10%

A credit mix refers to the different types of credit products on your credit file such as credit cards, car loans, lines of credit, mortgages, etc. Your credit mix makes up 10% of your credit score, and the more diversity the better. Having a mix of different types of credit is beneficial because it shows your ability to various credit products responsibly.

5. Credit Inquiries: 10%

Finally, credit inquiries account for 10% of your credit score. Every time you apply for new credit, the lender performs a hard credit check, also known as a credit pull, to access your file and assess your creditworthiness. Hard credit checks are recorded as an inquiry on your credit report. Multiple inquiries in a short period can be a red flag for lenders because it can indicate financial distress.

Relationship Between Credit Score Calculation & Credit Score Ranges

The way a credit score is calculated directly influences which credit score range you belong to. Credit score ranges organize borrowers into categories to help lenders assess the level of risk associated with lending. There are five credit score ranges in Canada and they significantly influence lenders’ decisions on loan approvals, interest rates, and credit terms.

This article is the shortened version of an article originally published on Hardbacon.ca by Heidi Unrau under the title "How is Your Credit Score Calculated in Canada?".