Your credit score is a great way to understand your financial health. It is your reputation for paying your bills on time. You get a high credit score if you use credit wisely and a low credit score if you’re not responsible for it.
Companies use credit scores to make decisions on whether to offer you a mortgage, credit card, auto loan, and other credit products, as well as for tenant screening and insurance. They are also used to determine the interest rate and credit limit you receive.
Your credit scores are determined by several factors, such as whether you pay bills on time and the length of time you’ve used credit. Understanding what factors affect credit scores helps you plan the most effective way to build your credit or protect it.
What is a credit score?
Your credit score is one of the most important measures of your creditworthiness. It’s a three-digit number that falls somewhere between 300 and 900. The higher your number, the better your credit score is. The more likely potential lenders will view you as a responsible borrower who pays your bills and debts on time.
Credit score ranges
As mentioned above, Canadian credit scores range between 300 and 900. Though each potential lender will have its norms as to what credit scores are acceptable, the range from Equifax is a reliable guideline. A credit score between 300 to 559 is considered to be poor while scores from 560 to 659 are fair. A good credit score is usually between 660 to 724. If your credit score is between 725 to 759 it’s likely to be considered very good. A credit score of 760 and above is generally considered to be an excellent credit score. The higher your score, the more likely you are to get approved for loans and credit. You’ll more likely get the best interest rates as well.
What makes up your credit score?
Equifax and Transunion are the two main credit bureaus in Canada that are responsible for calculating individuals’ credit scores. While we don’t know the exact formula for how each of the two Canadian credit bureaus calculates your credit scores. There are 5 common factors used in most credit scoring models.
- Payment History. Your payment history accounts for 35% of your score. This shows whether you make payments on time, how often you miss payments, how many days past the due date you pay your bills, and how recently payments have been missed. Payments made over 30 days late will typically be reported by your lender and lower your credit scores. How far behind you are on a bill payment, the number of accounts that show late payments, and whether you’ve brought the accounts currently are all factors. The higher your number of on-time payments, the higher your score will be. Every time you miss a payment, you negatively impact your score.
- Utilization & Balances. Credit utilization, which accounts for 30% of your credit score, measures what percentage of your total available credit you’re using at any given time. So, if the borrowing limits on all your credit cards and lines of credit total $50,000, and you have outstanding balances of $25,000 on that available credit, your credit utilization ratio is 50%. In general, experts recommend you keep your credit utilization ratio under 35%.
- Credit History. The length of your credit history accounts for 15% of your score. The longer you’ve had your accounts open, the more positively it may affect your credit. It is favorable because it gives more information about your spending habits.
- Credit Mix and or Public Records. This factor accounts for 10% of your score. Equifax appears to put more emphasis on information from public records, including whether you have a history of bankruptcy or overdue accounts being sent to collection agencies. TransUnion, on the other hand, appears to more carefully consider the different types of credit you use. Looking for a good mix of revolving credit accounts such as credit cards and lines of credit as well as installment accounts such as student loans, auto loans, or a mortgage.
- Credit Inquiries. This factor makes up the final 10%. New credit involves how many credit checks, or inquiries, you’ve had recently. Only hard inquiries (when a lender checks your report to make a lending decision) are counted – soft pulls do not. If you’re checking your credit score or verifying your identity with a service, these do not count. Each credit inquiry stays on your report for 2 years. More inquiries may suggest potential financial trouble and may lower your score.
The weight assigned to each category can vary depending on your circumstances. If you’re just starting to establish credit, the factors used to calculate your score may be different than for someone who has a longer credit history.
Average credit score by age group
According to Equifax Canada, one of Canada’s major credit bureaus. The average credit score for Canadians in the youngest age group is 692, while the average credit score for those 65 and older is just over 740. The average credit score also increases with age, according to historical data. The average credit score in Canada by age group is as follows.
Credit scores are just numbers that lenders and other businesses use to determine a person’s creditworthiness. They aren’t an exact science, and there are other factors of your finances that affect your ability to achieve financial goals. But, generally speaking, having an excellent credit score can help boost your financial confidence and security. If you want to have access to the best deals, make sure that your credit remains strong. Since it’s your credit score, you have the power to make it what you want it to be.
On the other hand, if you are looking for a car loan, we can assist. Here at Edmonton Auto Loans, we offer different types of car loans to people with all sorts of credit. Get pre-approved here today!