How Is Canadian Credit Score Calculated?
Your credit score is a significant factor when it comes to financial decisions such as applying for a loan or mortgage. In Canada, credit scores are calculated based on a few key factors to determine an individual’s creditworthiness. Understanding how these scores are calculated can help you improve your creditworthiness and make smarter financial decisions. In this article, we will explore how Canadian credit scores are calculated and answer some frequently asked questions about the topic.
The most commonly used credit score in Canada is the FICO® Score, which ranges from 300 to 900. This score is calculated by credit bureaus, such as Equifax and TransUnion, using a number of factors. Here are the main components that contribute to your credit score:
1. Payment History (35%): Your payment history is the most crucial factor in calculating your credit score. Lenders want to see if you consistently make your payments on time, including credit cards, loans, and mortgages.
2. Credit Utilization (30%): This factor looks at how much of your available credit you are using. It is recommended to keep your credit utilization below 30% to maintain a good credit score.
3. Length of Credit History (15%): The length of your credit history is also an important factor. Lenders prefer to see a longer credit history as it demonstrates your ability to manage credit over time.
4. Credit Mix (10%): This factor considers the different types of credit you have, such as credit cards, loans, and mortgages. Having a mix of credit can positively impact your score.
5. New Credit (10%): Opening multiple new credit accounts within a short period can potentially lower your credit score. Lenders may view it as a sign of financial instability.
Now, let’s address some frequently asked questions about Canadian credit scores:
1. How often should I check my credit score?
It is recommended to check your credit score at least once a year to ensure accuracy and detect any potential errors or fraud. You can request a free credit report from each credit bureau once a year.
2. Will checking my own credit score negatively affect it?
No, checking your own credit score is considered a “soft inquiry” and does not impact your credit score. Only “hard inquiries” made by lenders when you apply for credit can affect your score.
3. How long does negative information stay on my credit report?
Negative information, such as missed payments or collections, typically stays on your credit report for six to seven years. Bankruptcies can remain on your report for up to 14 years.
4. Can I improve my credit score quickly?
Improving your credit score takes time and consistent responsible financial behavior. However, paying your bills on time, keeping your credit utilization low, and avoiding excessive new credit applications can help improve your score over time.
5. Can I erase a bad credit history?
You cannot completely erase a bad credit history. The only way to improve your credit is by consistently demonstrating responsible credit behavior over time.
6. Does my income affect my credit score?
Your income does not directly impact your credit score. However, your income may play a role in determining your creditworthiness when applying for certain types of credit, such as a mortgage.
7. Can I rebuild my credit after bankruptcy?
Yes, it is possible to rebuild your credit after bankruptcy. By responsibly managing your finances, paying bills on time, and using credit responsibly, you can gradually improve your credit score.
In conclusion, Canadian credit scores are calculated using several key factors, including payment history, credit utilization, length of credit history, credit mix, and new credit. It is important to understand these components and their impact on your creditworthiness. By practicing responsible financial habits and being aware of your credit score, you can make informed decisions and work towards improving your credit standing.