That’s right, I think credit scores are kinda nonsensical but sadly they are hugely important. A bad one can have some pretty severe consequences. It will have an impact on your ability to borrow for a car or a house. It even effects the finance rates you will get when you do borrow. So you better be checking yours regularly and learn how to manipulate their calculation factors to improve your credit score. Most of the information I provide is specific to Canada but all the info is applicable just about anywhere.
My Perfect Score
Depending who you ask I actually have a perfect 900. I managed to achieve this in early December through diligence and a little manipulation. Read along to see how
What is a Credit Score
Your credit score is a three digit number ranging from 300 to 900 and represents your credit worthiness. With 900 being outstanding and 300 being really really bad. The average credit score in Canada is about 762. It is calculated using proprietary rules based on your credit history and a number of other factors. It is used by lenders, landlords, cell phone companies and potentially even employers to assess your overall financial responsibility. They are essentially trying to calculate your likelihood of your paying the money back.
This table shows the ranges of credit scores and how they are considered by lenders. I’ve also included the approximate percentage of the population sitting in those buckets. Surprisingly the vast majority of people have pretty good scores.
| Score | Rating | % of Pop |
|---|---|---|
| 300 to 574 | Very Poor | 5 |
| 575 to 659 | Poor | 10 |
| 660 to 712 | Fair | 10 |
| 713 to 740 | Good | 15 |
| 741 to 900 | Excellent | 60 |
Before we go into the details of how they get calculated let’s go into why I think they are a bit silly.
You Have More Than One
That’s right, there are actually two primary agencies that calculate credit scores and they can be fairly different depending on a few factors. In Canada, the two major credit bureaus are TransUnion and Equifax. You saw above that I have a perfect 900 but that’s with TransUnion, with Equifax it’s only 830. Both are great scores but why are they different?
First, the highest possible score are not the same. TransUnion uses 900 as a perfect score whereas Equifax it’s 850. They are both using different proprietary scoring models that generally use the same key factors however they weigh do them slightly differently. They also have different information based on what and when it was reported to them. For example, my TransUnion score is missing a number of hard credit checks that appear my Equifax report.
I regularly check both which you can do directly through each agency or using 3rd party services. CreditKarma for example uses TransUnion and Borrowell uses Equifax. Both not only give your score but access to your full report for free. They also provide useful tips based on what factors are impacting your individual scores.
Many of the Canadian banks are also making this information freely available through their banking apps. Canadian law dictates that you are entitled to get a free credit report monthly.
Their Rules Don’t Always Reflect Current Reality
The data and rules credit agencies use are purely based on credit history which may or may not reflect your actual ability to repay future credit. The credit score is very point in time and people’s financial stability changes over time. What was true two years ago is not necessarily true today. A number of negative factors can stay on your record for what may seem like an unreasonable amount of time.
A big challenge from some people is that no credit history = bad credit score. Since their scores are highly dependent on credit history information, not having any impacts a number of factors that ultimately lower your score. This can sometimes be a problem especially for those who potentially avoided credit in favour of saving but then suddenly want to buy a house. You are punished for never borrowing money.
Hard credit score checks have a negative impact especially if you have too many within in a short period of time. But does other people checking my credit score say anything about my ability to repay. Their thinking is that you are running into financial trouble and potentially require more credit to get by. But is that always the case. I switched cell phone companies twice in 1 year mostly for better terms. Unfortunately it was also the same year I bought a new car and increased my HELOC for investment purposes. These actions had a fairly significant impact on my credit score in 2024 but were actually in some cases improving my financial health.
Missing Information
Frankly, there is a ton of financial information missing from their consideration that have an equal or higher impact on your ability to repay debt. They do not have information on your current income for example. Nor do they know anything about any of your current assets. Nothing on how much you have currently sitting in your bank account, or how much your house is worth or how much is in your investment portfolio. They have zero knowledge of your cash flow or you net worth.
Another gap is they generally don’t know about rent payments. This is a pretty big one and the federal government in Canada had proposed legislation to address with mixed reviews. This means that many people’s largest recurring payment is not even factored in. On the flip side poor credit doesn’t necessarily mean tenants have trouble paying their rent. As a landlord myself, selfishly I care much more about if a potential tenant regularly paid their rent than if they regularly paid their cell phone bill. Sorry Bell and Rogers.
They Can Be Manipulated
Let me be clear they cannot be manipulated to make someone with bad credit look good but you can definitely take simple steps to make your overall score better. I didn’t get a perfect 900 purely by chance. What’s strange is that some of the actions involve doing things that don’t necessarily make much sense.
Let’s go into the factors that are used to calculate your score with some tips and tricks on how to improve your overall score.
The Key Factors That Impact Your Credit Score
Credit Score Factors
It’s important to know that it’s not 100% clear on how the scores are calculated since the formulas are completely proprietary. You will often see the following breakdown.
Payment History – Score Impact High
It should come as no surprise that the number one thing that impacts your credit score is making your payments on time. Any missed payments will be clearly visible in your report and the later you are the worse it gets. A late payment likely won’t show up till it’s over 30 days past due. A single 30 to 60 day late payment can generally be recovered from in time. Anything over 90 days is bad and runs the risk of being sent to collections which will have a much larger impact.
Warnings: Be aware that your cell phone payments also appears on your credit report despite it not being a form of credit. Any missed payment can stay on your record for up to 6 years.
Recommendations: Automate as many payments as possible to avoid ever missing them unintentionally. If you are late on payments, contact the lender to make an arrangement before it gets sent to collections.
Credit Utilization – Score Impact High
This represents the ratio between your total available credit and the amount owing across all your revolving credit. Revolving credit would include credit cards, personal lines of credit and home equity loans (HELOCs). An overly high utilization indicates that you may be having financial difficulty and on the verge of not being able to meet your financial obligations. You want to keep your total utilization less than 30% and ideally no individual account also less than 30%. Between 1 and 10% is highly recommended but I’m currently at a fairly high 27% with no impact. Credit utilization and how it is factored causes some actions around credit to be fairly counter intuitive in my opinion.
Warnings: Cancelling unused credit can seem like a really good idea but in many cases it will have a negative impact on your score especially if it increases your credit utilization beyond the 30%. I see many people do this to help with self control on spending without understanding the potential impact. If you feel this is necessary try to get rid of the most recent credit first. I will explain in more detail under Credit History Length.
Recommendations: Taking the free offers to increase your credit limit can actually have a positive impact on your score since you are increasing the total available credit. Taking the offer avoids having a credit check which would occur if you actually applied for an increase in credit. This also seems counter intuitive. How can having more credit improve your credit score. Again it goes down to improving the credit utilization, the more unused credit you have the better. Obviously, you should only do this if you are extremely diligent and good at managing your credit.
Derogatory Marks – Score Impact High
This includes two key items, anything that has been sent to collections and any personal bankruptcies that you have filed. These are giant red flags as it demonstrates that you have failed to meet your financial obligations in the past. Having anything sent to collections should be avoided at all costs and bankruptcy should be truely a last resort. Unfortunately the stigma of bankruptcy has virtually disappeared and even worse the repeat rate is nearly 25%. The easy access to credit today often leads many to overspend and get themselves into a position that they cannot recover without declaring bankruptcy.
Warnings: Bankruptcies can stay on your report for up to 6 years and multiple bankruptcies up to 14 years.
Recommendations: Address anything sent to collections as soon as possible to avoid further impact. Where possible you should consider a consumer proposal over bankruptcy. This will have you pay back a portion of your debt and have less impact on your credit score. I’m not an expert so be sure to always consult a credit and debt specialist.
Credit Age – Score Impact Medium
This is a combination of your average credit age and total credit history length. The total credit history length is literally the age of your oldest credit account. Simply, the longer you have been borrowing and successfully paying it back the better. An average below 5 years is on the lower end and may negatively impact your score. For reference my average credit age is 7 years and 2 months which is considered fair and my credit history length is 27 years and 7 months.
Warnings: Avoid closing your oldest accounts as it will decrease your average credit age. Opening new credit accounts will decrease your average credit age so be sure to consider that when opening new accounts.
Recommendations: Keep the longest credit account you have open forever. Never close that account.
Credit Inquiries – Score Impact Medium to Low
A hard inquiry is what lenders do to evaluate your credit worthiness. Anytime you apply for credit expect a hard inquiry, it’s kinda the whole point of the credit score system. Others may also do a hard inquiry, like telecom providers and utility providers. Potential landlords will likely do one too if they are doing their due diligence. I surely do. A hard inquiry will pull your credit score including your full credit report. A few inquiries a year are not going to have a dramatic effect on your score and will resolve over time. The credit bureaus will typically combine multiple queries if they are for a car loan or mortgage if they are within a few week window.
Warnings: Avoid too many queries close together as this may signal that you are running into financial trouble and are using credit to survive. Hard inquires will stay on your record for 3 years.
Recommendations: Try to only apply for credit that you know that you are sure to get approved. This will avoid the potential of being forced to go to another lender who will also do a query. You can also ask some lenders or service providers to not perform a hard inquiry especially if you are already an existing or past customer.
Credit Mix – Score Impact Low
This is the total number and types of accounts you have open. This could be credit cards, car loans, personal lines of credit, mortgages, etc. The credit bureaus likes to see a mix of account types that are successfully being managed and payed. Having only a single account can have a negative impact on your score.
Warnings: Unfortunately, having no credit or limited credit is not great.
Recommendations: Consider opening both a credit card and a personal line of credit to improve your credit mix and provide options to avoid paying high credit card interest. Learn to manage credit don’t avoid it.
Last Words
You should be checking your credit score and full credit report monthly. Managing your credit score is an important aspect to financial health. Understanding how lenders see you as a potential borrower puts you in a better position when you do need to borrow. It allows you to be assured that you will get approved and puts you in a good position to negotiate better lending rates. These interest savings can be significant when making large purchases such as a home or car.
Finally, another critically important reason to frequently check your credit report is to catch and avoid identify theft which is a growing problem. Others applying for credit in your name will show up on the report immediately. The sooner you catch this the sooner you can report it and avoid having it negatively impact both your credit score and other aspects of your life.
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