Your score is calculated through careful analysis of information in your credit report by the credit bureau, either Equifax or TransUnion. Financial institutions use this information to help make decisions about the services and products they offer you, such as interest rates and insurance premiums.
Below are the five main factors that impact your overall score and the % each factor contributes to your total score:
- Your payment history - 35%
Your payment history is the biggest factor impacting your credit score. It shows lenders whether you've been making on-time payments. It's important to pay all your bills on time and make at least the minimum payments on them to protect your score. Even one late payment can have a major impact on your score.
- Your credit card and line of credit usage (aka your credit utilization ratio) - 30% Your credit utilization is the amount of credit you've used out of the total amount available to you. The lower your credit utilization, the more attractive you are to lenders. Credit utilization only impacts your revolving credit (credit cards and line of credits). You can figure out your credit utilization by dividing your total revolving debt balances by your total limit. Carrying large balances on your credit cards suggests you’re not able to pay them off in full, credit bureaus see this as an indication that you might have problems paying bills in the future. If for example, you’re relying on your credit to cover your regular expenses, once your credit cards are maxed and the lines of credit are used up, you may not be able to cover loan payments. We recommend keeping your utilization below 30%. Credit providers and financial institutions will see your low ratio as responsible credit use. For example, if your credit card limit is $1,000 and your balance is $300, your utilization is 30%.
- Length of credit history of your overall credit file and your individual accounts - 15% Your credit history is the duration of time you have spent building your credit. It is weighed based on how long your accounts have been open, how long it’s been since you’ve used them and whether they’re still active.
- Number of hard inquiries (to receive further credit) - 10 % A hard credit inquiry, sometimes referred to as a hard pull or hard check, happens when a potential lender checks your credit report when making their lending decision. Lenders and other companies require your permission before making a hard credit inquiry. Hard credit inquiries provide lenders full access to your entire credit history. When a lender performs a hard inquiry, it will slightly lower your credit score.
- Your credit variety (loans, credit cards, mortgages, open (i.e.phone bill) - 10% Your credit variety refers to the various types of credit accounts that make up your credit report. There are four main types of credit that could appear on your credit report
- Instalment loans (i.e. auto loan, personal loan)
- Revolving credit (i.e. credit card, line of credit),
- Open accounts (i.e. phone bills).
Credit bureaus use credit mix as a factor when calculating credit scores because it indicates whether the user can manage various accounts over time. A healthy credit mix, along with a history of on-time payments, tells borrowers that you have the financial management skills to handle a variety of credit products and make regular payments towards them.