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Which factors affect your credit score?

Posted on 29 February 2024

Written by Alan Spergel

Your credit score is a numerical representation of your creditworthiness, and it plays a crucial role in your financial life. Lenders use it to assess the risk of you borrowing funds from them, impacting your ability to secure loans, credit cards, or favourable interest rates. For this reason, you likely want to ensure your credit score is in as good a standing as possible. But which factors affect your credit score? Understanding the factors that influence your credit score is key to managing and improving your financial wellbeing. In this article, we will delve into the key elements that affect your credit score, as well as sharing what to do if you feel your credit score is in need of some rebuilding.

Which factors affect your credit score?

There are several factors that affect your credit score, each carrying different levels of weight. Here is an overview of the factors and how they proportionately affect your credit score overall:

Payment history (35%)

Payment history is the most significant factor influencing your credit score. Lenders want to see a consistent record of on-time payments. Late payments, defaults, or accounts in collections can significantly impact your score.

Credit utilization (30%)

Credit utilization refers to the percentage of your available credit that you are currently using. High credit card balances relative to your credit limit can negatively affect your credit score. It is generally good practice to keep your credit utilization below 30% for optimal results.

Length of credit history (15%)

  • The length of time your credit accounts have been active matters. A longer credit history can be viewed positively, showcasing your ability to manage credit responsibly over time.

Types of credit in use (10%)

Lenders like to see a mix of credit types, such as credit cards, instalment loans, and retail accounts. However, it is essential to only open credit accounts that you genuinely need and can manage responsibly, otherwise this can lead to other problems.

New credit (10%)

  1. Opening multiple new credit accounts in a short period can be perceived as risky behaviour. Each new inquiry can have a small negative impact. Be mindful of how frequently you apply for new credit.

Other factors that can affect your credit score include having a judgement, a lien, foreclosure, or a bankruptcy that has been reported to the credit bureau. Having this information on your credit history can negatively impact your score for several years. Equally, having an overdue account go into collections or having your debt bought by a debt collector can be viewed unfavourably by creditors.

What does the weight of each factor mean?

The weight given to each of the factors indicates the proportionate value they have on your overall credit score. There are high impact, medium impact, and low impact factors:

  • High impact: these include your payment history and credit utilization. In order to combat these factors, focus on making your payments on time and in full as they are due, and manage your credit card balances.
  • Medium impact: these include your length of credit history and the types of credit you have. Although it does take time to change your credit history, demonstrating responsible credit use and using a diverse mix of credit types over time can help to have a positive influence.
  • Low impact: this includes new credit. Exercise caution when applying for new credit, especially if you plan to make significant financial moves, such as applying for a mortgage, in the near future.

How to rebuild your credit score

If you are worried about having a poor credit score, don’t panic. In fact, no matter how bad you think your financial situation might be, there is always a solution. At Spergel, we have been helping Canadians to gain debt relief for over 34 years, and we have truly seen it all. As the ‘get rid of debt’ people, we are here to help you. Thankfully, there are several ways you can work on fixing bad credit. Here are a few of our recommendations:

  • Check your credit report – firstly, review your report to check for any errors or anomalies that might be impacting your credit score negatively
  • Pay your bills on time and in full each month. Set up alerts if you need a reminder
  • Work to reduce your credit card balances as much as you can
  • Avoid taking on new credit, especially multiples at the same time
  • Use a secured credit card over time, making your repayments in full and on time
  • Create a budget to avoid overspending and credit problems
  • Catch up on any late payments. Late payments will continue to appear on your credit report as overdue which will negatively impact your credit score
  • Speak to a Licensed Insolvency Trustee. If you are worried about your debts and your credit, an experienced Licensed Insolvency Trustee will help you. At Spergel, we offer a free, no obligation consultation to review your financial situation and offer advice on your pathway to debt relief

Which factors affect your credit score? FAQs

Here are some of the most commonly asked questions about the factors that contribute to your credit score.

What affects your credit score the most?

In Canada, the two most influential factors that significantly impact your credit score are your payment history and credit utilization. Payment history, contributing to 35% of your score, assesses your consistency in making on-time payments for credit accounts. Any missed payments, defaults, or accounts in collections can substantially lower your score. Credit utilization, making up 30% of the score, evaluates the percentage of available credit you’re using. High credit card balances relative to your credit limit can negatively affect your score.

Why is my credit score dropping?

There are a few reasons why your credit score might be dropping:

  • Missed or late payments
  • High credit card balances
  • New credit applications
  • Defaulting on loans
  • Accounts in collection
  • Public records or filing bankruptcy
  • Closing old credit accounts
  • Errors on your credit report
  • Financial hardship

If you are experiencing a sudden drop in your credit score, you should check your credit report for any inaccuracies, and speak to a Licensed Insolvency Trustee. Understanding the factors that affect your credit score can help you take targeted actions to improve your financial situation.

Do unpaid bills affect your credit?

Yes, unpaid bills can significantly affect your credit. When bills, such as credit card payments, utility bills, or loan instalments, go unpaid, it can lead to late payments and, eventually, default. Late payments are reported to credit bureaus and can result in negative entries on your credit report. These negative marks have a detrimental impact on your credit score, making it more challenging to secure new credit and potentially leading to higher interest rates on future loans. In extreme cases, unpaid bills that are sent to collections or result in legal actions, such as judgments, can have even more severe and lasting consequences on your creditworthiness. It is crucial to prioritize timely payments to maintain a positive credit score and protect your overall financial health.

How common is a 900 credit score in Canada?

In Canada, a credit score of 900 is not common, as credit scores typically range from 300 to 900. Achieving a perfect credit score is rare, and only a small percentage of individuals reach the highest possible score. The factors that contribute to a high credit score include a history of consistently making on-time payments, maintaining a low credit utilization ratio, having a diverse mix of credit types, and a lengthy and positive credit history. While many Canadians have good to excellent credit scores, reaching the maximum score of 900 requires a near-flawless credit history and financial management. It’s important to note that lenders generally consider credit scores above 800 as excellent, and individuals with scores in this range usually qualify for the most favourable interest rates and credit terms.

Is 700 a bad credit score in Canada?

A credit score of 700 in Canada is generally considered to be a good score. Credit scores in Canada typically range from 300 to 900, with higher scores indicating better creditworthiness. Here is a general breakdown of credit score ranges:

  • Excellent: 800-900
  • Very Good: 720-799
  • Good: 680-719
  • Fair: 580-679
  • Poor: 300-579

With a credit score of 700, you fall into the “good” category. While it is not the highest possible score, it is above the average and should qualify you for most financial products. However, keep in mind that lenders may have criteria that vary slightly, and factors beyond your credit score, such as income and debt-to-income ratio, also play a role in their decision-making process. It is always a good idea to continue practising responsible credit habits to maintain or improve your score over time.

Your credit score is a dynamic and responsive reflection of your financial behaviour. By understanding which factors affect your credit score, you can take proactive steps to build and maintain a healthy credit profile. Regularly monitoring your credit report, addressing any inaccuracies, and making strategic financial decisions will empower you to navigate the credit landscape successfully. If you need further support, book a free consultation with Spergel, the ‘get rid of debt’ people.

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Alan Spergel

Alan Spergel

Alan Spergel is the founder and President of Spergel. A leader in our industry, he is also a former chair of the Canadian Association of Insolvency and Restructuring Professionals (CAIRP) and has served on Canada's Superintendent of Bankruptcy Management Board. He actively supports multiple charities, ensuring that Spergel gives back to our communities and has recently been appointed as Chairman of the Board of the Humber River Hospital Foundation. Outside of the boardroom, you can find Alan playing golf, tennis, or skiing and enjoying quality time with his grandchildren.

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