How Your Canadian Credit Score is Calculated

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by Enoch Omololu

Updated

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Have you ever wondered about how your credit score is calculated? You are not alone!

If you have ever applied for a credit card, personal loan, car loan, or mortgage, then you must know that the lender pulled up your credit bureau file and used your credit score to assess your creditworthiness.

The higher your credit score, the easier it is for you to qualify for credit at a competitive interest rate.

How is Your Credit Score Calculated?

The answer is not plain black and white. The score that you get when you purchase your credit score directly from the two major bureaus – TransUnion and Equifax – may be different from the score that individual lenders compute when they assess your credit file.

Note that credit scores are now available for free from financial technology companies in Canada including Borrowell, Mogo, and CreditKarma. Generally, the credit scores you will receive from these sources are ranked as follows:

  • 760 – 900 → Excellent
  • 725 – 759 → Very Good
  • 660 – 724 → Good
  • 560 – 659 → Fair
  • 300 – 559 → Poor

Factors that are usually considered by lenders and credit bureaus when calculating credit scores are similar. In general, numerical weights are applied to various aspects of your credit file and a formula is used to compute the final credit score.

The lender may calculate the score in-house or use the services of a vendor, such as FICO.

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Five criteria utilized by FICO (a major credit score vendor used by most financial institutions) include:

1. Loan Repayment History (35%)

This makes up 35% of your credit score, making it the most important factor when credit scores are concerned. This criterion takes a look at how you have been paying off the debt owed on your credit cards, car loans, a line of credit, cellphone bills, etc.

Do your payments come in late? any delinquencies? bankruptcy? missed payments? debts in collections? liens? and so on. Paying your bills on time, all of the time is a good maxim to live by.

2. Total Amount Owed (30%)

This comes in second place in the order of importance and determines 30% of your credit score. This criterion looks at how much you owe across the board, and how easy it is for you to pay what you currently owe. Additionally, it assesses your current debt-to-credit ratio.

If your credit utilization ratio is very high, it may have a negative impact on your score. Keeping your credit balance at 35% or less of your credit limit looks better to lenders. For example, if you have a credit card with a credit limit of $1,000, try to keep the outstanding balance below $350.

3. Length of Credit History (15%)

When you have used credit for a long time, lenders are better able to assess your creditworthiness, for good or bad. If you don’t have a credit history, lenders have nothing to work with and cannot assess your creditworthiness.

This is why people new to credit always start with a lower credit score. The longer you use credit responsibly, the better your credit score. This is one reason why it may not be advisable to close old credit card accounts.

Related: How to Improve Your Canadian Credit Score Fast

4. New Credit Accounts and Applications (10%)

When you apply for new credit, lenders make what is known as a “hard inquiry” on your credit file and this is reflected in your credit history. The number of recent credit accounts or inquiries and their frequency will impact your credit score.

If you have many inquiries within a short period of time, lenders may assume that you are having financial difficulties and therefore pose an increased credit risk.

Inquiries made by you such as when you request your credit score or report, are referred to as a “soft inquiry” and do not impact your score in any way.

5. Credit Mix (10%)

This makes up 10% of your credit score. Having a diverse mix of credit such as a mix of credit cards, lines of credit, mortgage, and personal loans, will impact your score positively if they are in good standing.

Conclusion

Credit scores are very important in Canada and can impact your financial realities in more ways than you can imagine. Understanding how they are calculated can be helpful if you are trying to improve your credit score.

You can obtain your free credit report and credit score from a few companies, including Borrowell.

Get your Free Credit Score!

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Author

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Enoch Omololu

Enoch Omololu is a personal finance expert and a veterinarian. He has a master’s degree in Finance and Investment Management from the University of Aberdeen Business School (Scotland) and has completed several courses and certificates in finance, including the Canadian Securities Course. He also has an MSc. in Agricultural Economics from the University of Manitoba and a Doctor of Veterinary Medicine degree from the University of Ibadan. Enoch has a passion for helping others win with their personal finances and has been writing about money matters for over a decade. His writing has been featured or quoted in The Globe and Mail, Winnipeg Free Press, Wealthsimple, Financial Post, Toronto Star, Credit Canada, MSN Money, National Post, CIBC, and many other personal finance publications.

His top investment tools include Wealthsimple and Questrade. He earns cash back on purchases using KOHO, monitors his credit score for free using Borrowell, and earns interest on savings through EQ Bank.

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