Have you ever wondered about the factors that determine your credit score? Trust us, you’re not alone. For the most part, people are worried about what their credit score is but can be unaware of all the factors that contribute to their score. In Canada, credit scores can range from 300 points to 900 points. A score of 680 or higher is considered good, and anything above 780 is considered excellent. Having a strong credit score is an important financial asset that goes a long way in getting you the best mortgage possible when purchasing a home.
So what are the five main factors that determine your credit score?
Your Payment History
The most important and well-known factor affecting your credit score is your payment history, aka, have you paid your bills on time. Credit cards, cell phone bills, car payments, and student loans are just a few examples of payments that determine your credit. The more frequently you’re late or fail to make these payments, the more your credit score drops. Paying your bills on time, every time is a great rule of thumb to live by. We also recommend automating as many of these payments as possible in case anything else arises on the payment day.
Amount You Currently Owe
The second most important factor to determine your credit score is the outstanding money you currently owe. Lenders use this to considers all the debt you have, and determine your ability to meet your monthly debt obligations. It also takes into consideration your Debt to Income (DTI) ratio, which we wrote about earlier this month (you can check that post out here). Lenders typically like to see a DTI of 36% or less, as a higher ratio can often indicate higher risk.
Your Credit History Length
This section of your credit score calculation takes into account how long your credit accounts have existed for. This explains why young people and those new to credit start off with lower scores. In general, creditors like to see that you have a well-rounded history paying your bills on time. The longer you demonstrate responsibility when it comes to paying your bills and debts on time, the higher your credit score will be.
While not as common as some of the other factors on this list, public records can also have an impact on your credit score. This applies to you if you have a prior history of bankruptcy, lawsuits, judgments, leans, or foreclosures. Unfortunately, at times, these events can have negative effects on your current credit score. Although detrimental, public records are typically not weighted as high as the first three factors are.
The Number of Inquiries Into Your Credit File
Lastly, the number of inquiries into your credit score also can reduce your score itself. Anytime a person’s credit file is accessed for any reason, it’s counted as an inquiry. The thing to keep in mind here is that only certain types of inquiries will negatively affect your credit score. These inquiries are known in the industry as “hard hits” and “hard pulls”.
It’s important to keep in mind that not every inquiry will negatively affect your credit score. Creditors looking into your credit file when you apply for a mortgage will not reduce your credit score in any way, and neither will checking your credit score through certain service providers. These are referred to as “soft hits” or “soft pulls”.
Bonus – What Things Don’t Affect Your Credit Score?
When it comes to what counts and what doesn’t, there are plenty of myths floating around. The following list of factors don’t come into account when determining your credit score:
- Your current salary
- Marital status
- Age (though FICO says some other types of scores may consider this)
- Race, religion, national origin
- Occupation (though lenders may consider this)
- Any information not found in your credit report
Every day we help our clients become more educated and more aware of how credit works and the ways they can improve their credit scores. If you want to talk to an expert about credit score and the mortgage application process, we’re always happy to review your situation regardless of what your credit looks like. You can get in touch with us here.