How To Understand Your Credit Score

18 November 2014

Knowing, maintaining and understanding your Canadian credit score is an important part of being financially savvy. Your credit score is essentially a judgment of your financial state at a specific point in time based on a number of relevant factors. When assessing your score – which ranges from 300 to 900 – you will look for a higher number, as this means a lower risk for lenders and better financing options for you.

It is important to note that lenders often have their own ways of determining credit scores, or what the lowest number is that will still qualify you for their loan options. Lenders also use use your credit score to determine the interest rate that you will have to pay in accordance with your loan amount.

But you might be wondering what kind of factors play into your overall score. There are a number of variables that come together to determine where you rank. Here are some of the key variables that you should be aware of:

  • Account History – Lenders will look at how long you have had your various accounts and at what point you opened a line of credit. With this information, they can determine how reliable you are at paying back on time and borrowing against what you can afford.
  • Bankruptcy or collections – Have you ever had a collection agency call or collect a bill from you? This means that whoever you owed money to had to rely on a third party to retrieve their money from you, making you a less reliable borrower. The same goes for filing bankruptcy. An instance of bankruptcy on your file will indicate to lenders that you may not have been fiscally responsible.
  • Inquiries – Inquiries occur whenever you apply for a loan or line of credit to afford things like an apartment, home or car. The more inquiries, generally, the worse your credit score.
  • Outstanding Debts – It is common sense that outstanding debts will be a negative indicator for lenders who want to be sure to get back any money they loan out. For this factor, banks and financial institutions will look at the limit set on your credit card and whether or not you are spending at or near that limit.
  • Type of credit – Lenders will look at whether all of your debt is in credit cards, loans or a mix of the two. Generally, a mix of the two is better than all your debt in one place.
    • Not all of these factors have the same weight in your overall score, but they do lend themselves to some helpful insights into your financial decisions. With that said, the two most important factors are whether or not you have ever declared bankruptcy and the amount of your outstanding credit balances.

      Even if your score is not the best that it can be right now, remember that your credit score should be checked regularly as your score may change over time. Regardless of how long you have been accruing your credit, be sure to conduct a Canadian credit check to know your standing and if you need to improve.