How Is My Canadian Credit Score Calculated?

30 November 2015

Every Canadian who has ever applied for a line of credit, whether a mortgage, auto loan or even a retail charge card, has a credit history. Collected and organized into reports by the two credit bureaus in Canada, Equifax and TransUnion, your credit data serves as a snapshot of your financial behaviour. Before approving new credit, lenders typically review applicants’ credit reports to get a sense for their creditworthiness. To get an overall sense of the contents of a credit report without having to analyze each line item, lenders typically reference a borrower’s credit score, which provides a numerical summary of a borrower’s debt responsibility.

Maintaining a high credit score can qualify you for better loan rates, as lenders will have reason to trust that you will make your payments on time. Protecting your score depends first and foremost on knowledge. Without a complete understanding of how the system works, even the most reliable borrowers may take on habits that can hurt their scores.

To determine a credit score, lenders can either hire a vendor to calculate the number—FICO is one well known vendor that does this for companies—or they can calculate it based on their own formula. This is the reason your credit score can vary from one place to another.

Although credit scores vary depending on the lender, many use a blend of the following factors to calculate your Canadian credit score:

  • Payment history: Making payments on time for all of your accounts can help bring your score up. On the other hand, late payments, delinquent or over-limit accounts, bankruptcies and liens can hurt your score.
  • Total amount you owe: Your debt-to-credit ratio compares how much you owe to the amount of credit you have available. Keeping a high credit card balance can bring your score down as it may suggest you have difficulty affording your monthly payments. If you have a high credit limit and you keep your balances low, however, your debt-to-credit ratio will be low. So, if you can commit to keeping your monthly balances low, a higher credit limit can help you protect your good credit score.
  • Length of credit history: The longer you have demonstrated strong credit management skills, the more likely you are continue that behaviour. This metric shows how long you’ve been using credit and how well — or poorly — you’ve managed your finances in the past.
  • New credit accounts and inquiries: Applying for too much credit can lower your score. This category keeps track of any recent credit applications you’ve filed and any hard inquiries that have been made for your credit file. A hard inquiry takes place when a creditor pulls a copy of your report to provide context to a credit application. Checking your own credit report won’t affect your score, as this initiates what is known as a soft inquiry.
  • Types of credit in use: Demonstrating smart borrowing habits with a variety of credit types can give borrowers a slight boost in their credit scores. Because of this, a credit score typically takes into account all of your lines of credit — credit cards, installment loans, mortgages and other types of credit. It’s not necessary to have one of each, however, and it’s never a good idea to open credit accounts you don’t intend to use.

No one has just one credit score. Because of the different formulas you could have several different scores, so it is important to remember to pay attention to fluctuation trends rather than individual point changes when monitoring your credit score.

If you notice unexpected changes in your credit score or unusual activity in your credit report, it could indicate fraud or identity theft. To catch fraud early you must monitor your credit files often. Signing up for a credit monitoring service can help because they can review your credit files as often as every business day and alert you if they detect certain activity on your account that may indicate fraud.