If it were a sport, a credit score of 650 would get you in the game. 800 would get you on the starting lineup and 850+ would make you an all-star.

Your credit score can impact your life in a variety of ways. Whether it’s to obtain a mortgage, score a new rental unit or gain approval for your choice credit card — having a good score is important.

Personally, I didn’t realize how important it really was until it impacted accomplishing a financial goal that mattered to me. 

In 2019, myself and my not-so-pretty credit score walked into a car dealership. After neglecting my financial health almost entirely for a year and blowing right past my savings and into the dark and deviant world of credit card debt, I had money monsters in my closet. When it was time to apply for a loan to buy a car, the lenders wanted to take a look around, which is common practice. 

Spoiler alert — they found the monsters.

At the time, my credit score was 599. I had recently started a new job and I was going to be on the road a lot. I wanted something newer, more fuel-efficient, and reliable. I knew this wasn’t the absolute best time for me to be buying a new car because of my financial position and credit score at the time. But, that didn’t matter to me because this purchase meant a lot. It was a statement to myself that I was ready to commit to a new career path. To me, it symbolized a commitment that I was embarking upon at a new stage in my career and in my life. I was willing to absorb the less-than-ideal terms in order to further engrain that belief in myself as I continued to press on and forge this new identity. 

Despite the high total cost of borrowing, I went ahead with the purchase. My rate on this auto loan is ridiculously high at around 8% APR. Yeah, not great. 

What I realized from this less than ideal scenario was how important your credit score could be in determining the rate at which you pay for things — or your ability to be approved for some purchases at all. 

Enduring this situation also led me to focus a lot more on my credit score over the past few years. I am happy to report I now regularly float around the 800 mark. But, this took time, work, and an understanding of how the system works. If you are here, I can only assume you want to learn more about what credit scores mean, how they impact you, and how they are calculated. So let’s get into it.

What is a Credit Score?

Credibility is the quality of being trusted and believed in. In other words, your ability to do what you say you will.

Quite literally, then, your credit score reflects your level of credibility in the eyes of a lender. In this case, you’re promising to make regular payments on time and in full of at least the minimum amount allowable. 

Every time you make the required payment on time, a little checkmark floats into the universe and lands on your credit history report. These checkmarks add up over time and boost your rating. Unfortunately, the opposite is also true. When you miss payments, your credit score decreases. 

There are other factors as well, which we will get into, but your proven ability to repay is the most basic and controllable factor determining your credit score.

How is Your Credit Score Calculated?

When it comes to your credit score, there are a variety of factors at play that determine where you stand financially.

#1. Payment History (35%)

This is why paying all of your bills on time and in full is so critical. It is the most heavily weighed factor in determining your credit score. 

Being behind and consistently missing payments will damage your score. Keeping up with your bills for long periods of time will allow you a little buffer that if you somehow end up missing one, it will still impact your score, but it will not be as detrimental as a consistent inability to pay your bills on time. 

This is yet another case for automating payments. The more we can remove human error and reliance on our own memory to keep up with all of the million things we have going on in our lives the better. Take the time to implement automated payments whenever possible.

#2. Credit Utilization (30%)

If you were to add up the limits on all your credit cards, lines of credit and other interest accruing access lines to capital, you’d have your total credit available. How much of that you currently use is your utilization rate. We can express this as a percentage by dividing what you’re using versus what’s available to you. 

For example, if you have the following:

• $7000 credit card limit with a balance of $2500

• $5000 credit card limit with a balance of $1000

• $10,000 line of credit with a balance of $3000

Say you are using $6,500 of $22,000 available. This would give you a credit utilization percentage of ($6500/$22000) = 29.5%. 

The rule of thumb is that anything below 30% is considered a good, healthy and acceptable level of credit utilization percentage. 

That doesn’t mean that if your credit utilization is about the same as the example above that you should be content with continuing to carry these balances. If your goal is to improve your score, lowering this number is a great place to start. Focus on lowering the balance you have on your credit cards and you’ll see your credit card inversely rise up.

#3. Length of Credit History (15%)

The longer you’ve had access to credit the higher your score will be in this category. This is why it often makes sense for parents to have a credit card in their children’s name before they have established the earning power to justify having one on their own, not to mention the self-discipline required to keep themselves out of trouble. Even a card with a $500 limit will help establish a baseline of credit history which will help them later in life.

However, we also realize that having a parent who is also financially equipped to help you build credit at a young age is a privilege. If you don’t have access to this, don’t worry. Your credit score will build with time.

A common question regarding credit history is whether you have to keep the first credit card you ever had just to keep a solid score. It’s not a bad question — considering many of us don’t have a choice in our first card and may not use it as much once we find one that’s better suited to our needs. But, this card is important to keep if you can. Even if you don’t use it, it’s still great to keep. If you really want to switch, consider asking your creditor if they can swap the card to a different type within their decision to keep the same card but upgrade.

#4. A Mix of Credit Types (10%)

Not all types of credit are the same. For example, revolving credit, like credit cards, come with the ability to spend up to a certain limit and then manage the balance with payments on your own timeline. 

For installation credit, such as loans, there is a fixed-payment schedule component to the agreement. These types of loans are often long-term with consistent payments of the same amount at the same time. Examples of this type of debt would be a vehicle loan or mortgage.

Lenders like to see a mix of credit because it gives them the sense that you can manage your finances and maintain your end of the obligation in various types of loans. Your ability to do so shows you’re a trustworthy and yet again, “credible” lendee. 

Keep in mind, though, adding more credit just to obtain a variety is not a good course of action to build your credit score. Each time you add an additional form of debt, lenders are on high alert, as this may look like you’re in need of access to more credit.

#5. Application Frequency (10%)

When applying for a new source of credit, whether it be a credit card, loan, vehicle, etc. the lender will run a “hard” credit check on your name. This is done out of necessity for the lender to understand your financial position and ability to pay back your loan as a way of managing their risk. When these reports are pulled, it slightly impacts your credit score. It’s annoying, but it’s a very minor adjustment, and it’s nothing to worry too much about.

Before applying for purchases or access to credit, be sure to clarify whether this is a “soft” check, which won’t impact your credit score, or a “hard” check, which will.

What is a Good Credit Score?

If credit scores were a sport, a credit score of 650 would get you in the game. 800 would get you on the starting lineup. 850 would make you an all-star. 

To obtain a mortgage in Canada, you’ll need a credit score of 680 and above. A score of 670 and above is a great way to score a vehicle loan with an ideal interest rate.

If you’re not quite in the game just yet, don’t be discouraged — you can still work your way up! Just like in the sporting world, the best way to improve is through deliberate practise and learning from others around you who are already performing at the level you aspire to. 

That is what has brought you here. You want to learn. Keep at it. Continue to absorb information and focus on your goals by improving the things within your control.

How Do I Check My Credit Score?

There are a variety of options for checking your credit score for free in Canada. Two of my favourite places for this are Borrowell and Credit Karma. Using these two platforms does not impact your credit score, as checking your own free report is considered a ‘soft’ check.

I like these tools for the following reasons:

• They provide a full credit report

• Bi-weekly updates via email notification

• A log of your credit inquiries

• An update on current debts owing

• User-friendly 

• Educational content

Regardless of the platform you choose, but especially if you go with a free one, you’re going to be “pitched” a lot of products. Remember, whenever a product is free, it is very likely that you are the product. 

So with these types of “free services” such as credit monitoring, one way or another the company is monetizing your data and your attention. They’re selling the aggregate data for analysis to lending agencies and they’re also selling ad space for financial service products. A certain percentage of users will click the ads and ultimately acquire the products; the mortgage, the line of credit, the credit card, etc. 

Remember that the purpose behind your utilizing this service is to improve your credit. Especially early in your credit repair journey, do not chase seemingly attractive opportunities. There is very likely fine print which makes the deal not so great. Ironically, so long as some people keep clicking these ads and the odd clicker eventually buys – these types of products will continue to be “free”.

My personal bank, Bank of Montreal, recently started to offer credit score monitoring which is kind of sweet. It’s fairly basic and doesn’t provide the level of detail I have grown to enjoy, but it still gets the job done and provides a basic understanding of where I am at. If all you’re looking for is the credit score number itself, check to see if your bank can already give you that.

One of the main benefits of checking your credit score is to confirm there is no fraudulent activity and protect yourself from any unwanted activity.

Stick to the Basics

It always comes back to basics. Don’t borrow more than you can afford or even close to what you think you can actually afford. Expect the unexpected and plan on the plan not going according to plan. Leave yourself a buffer and you’ll mitigate your risk. Spend less than you earn, save the rest. Your credit score will thank you for it.