
Having a credit score is like a right of passage into adulthood. However, navigating the realm of credit scores can often seem like an unnecessarily complicated journey.
For many, particularly young adults, immigrants, or those recovering financially, understanding what factors influence your credit score is essential for making smart financial decisions. It's about knowing what boosts your score, what harms it, and how to balance various credit-related activities.
In this article, we’ll break down these factors, helping you grasp how scores work, how to safely build your credit score, and how to manage it effectively.
What Is a Credit Score Anyway?
The origin of credit scores started in the 1800s. Today, you can think of your score as a report card for your finances. It's a number between 300 and 900 that tells your financial institution and other different lenders how good you are at borrowing money and paying it back.
To keep track of your credit scores, there are companies called credit bureaus. The three major credit bureaus in Canada are Equifax, TransUnion, and Experian. They watch how you use your credit cards, pay your bills, and handle your loans, and then they use this information to figure out your score.
What Impacts Your Score
So, how is a credit score calculated? Several key factors impact and are used when calculating credit scores, including the following:
Your Credit Report
This is a big one. Your credit report outlines your overall payment history. Lenders want to see how regularly you pay your bills. Your payment history, which you'll find in your credit report, includes everything from credit cards to phone bills.
If you pay everything on time, it shows you're reliable, which is great for your credit score. However, late payments or missing them entirely can hurt your score and are considered a red flag to lenders.
Credit Utilization Ratio
Credit utilization is about how much of your available credit you're using. Imagine you have a credit card with a $1,000 limit. If you've used $800 of that, your utilization is 80%, which is pretty high.
A lower credit utilization ratio, like using only $200 of your $1,000 limit, is better for your credit score. The rule of thumb is to keep your utilization below 30%.
Length of Credit History
The longer you've had credit, the better it is for your score. It shows lenders a longer track record of how you handle your money. So, if you've had a credit card for several years and use it responsibly, it helps your score.
Debt-to-Income Ratio
This measures how much debt you have compared to your income. If your debt is high but your income is low, lenders might think you'll have trouble paying back more debt. This can affect your credit score.
Types of Credit Accounts You Have
Having a mix of different types of credit can be good for your score. This could include a car loan, a mortgage, and a credit card. It shows you can handle different kinds of financial responsibilities.
New Credit Inquiries
If you apply for a lot of new credit in a short time, it might look like you're in financial trouble. This is why each time you apply for credit and the lender checks your score. It can lower your score a bit.
Negative Marks
Things like bankruptcies, foreclosures, collections, or liens can seriously damage your credit score. These are signs of serious financial distress and can stay on your credit report for a long time.
Remember, your score is like a financial fingerprint – unique to you and constantly changing based on how you manage your money.
Managing Your Credit Score
By understanding what affects your credit score, you can take steps to improve it, like paying bills on time, keeping credit card balances low, and not applying for too much new debt all at once.
Keeping an eye on your credit score and the factors that affect it is crucial. Regular monitoring can help you make informed decisions and spot any potential errors or issues quickly.
What Isn’t in Your Score
While understanding what affects your credit score is crucial, it's equally important to know what doesn't factor into it:
Income Level: Your income doesn't directly impact your credit score. Whether you earn a high or low income it's not factored into the score calculation. Credit scores are more about how you manage your credit, not how much money you make.
Bank Account Balances: The amounts in your checking or savings accounts also don't affect your credit score. Credit scores are primarily concerned with credit and debt management, not how much money you have saved up.
Employment Status: Being employed or unemployed is not something that will directly change your credit score. While employment information may be on your credit report, it doesn't influence the score itself.
Rent Payments: In most cases, your regular rent payments are not reported to the credit bureaus and, therefore, do not affect your credit score. However, there are some rent-reporting services that, when used, can ensure that your rent payments are included in your credit report.
Utility and Cell Phone Bills: Generally, payments for utilities and cell phone services are not reported to credit bureaus unless they are delinquent. Regular, on-time payments of these bills, while crucial for your overall financial health, usually don't improve your credit score.
By understanding what is and isn’t included in your credit score, you can focus your efforts on the factors that truly matter and avoid worrying about aspects that don’t contribute to your creditworthiness.
Remember, building and maintaining a good credit score revolves around responsible credit management, not necessarily the other aspects of your financial life.
What is a Good Credit Score to Have?
In Canada, credit scores range from 300 to 850 and are represented as a three-digit number, with the average credit score being 680 among Canadians.
Here's a quick breakdown:
Poor (300-559): This range may lead to challenges in loan approval and higher interest rates.
Fair (560-659): Fair scores might get you credit but with less favourable terms.
Good (660-719): A good score opens the door to competitive interest rates and loan approval chances.
Very Good (720-799): Those with very good scores enjoy favourable loan terms and interest rates.
Exceptional (800-850): The highest range, offering the best rates and credit terms, and is considered a perfect credit score.
A higher credit score offers numerous benefits, including lower loan rates and better chances of approval. However, it’s vital to avoid actions that can negatively impact your score, such as late payments, missed payments, or high credit utilization. Ultimately, a bad credit score means you're unable to borrow and manage your money responsibly.
Understanding where your score sits on this spectrum can help you make informed financial decisions and work towards improving your credit health.
How to Fix Bad Credit
Don't panic. You can fix bad credit, but it can take a while. If you want to build your credit and improve your credit score, here is what you need to do:
Get a free credit report and continue to monitor it over time.
But keep in mind that multiple inquiries in a short period can hurt your score. So, request it once at the beginning and then a couple of months later.
Lower debt by paying off high-interest debt first--specifically credit card debt.
Avoid opening new accounts by using your current credit accounts for everyday expenses rather than a major purchase.
In due time, consider diversifying your credit mix.
Set up automatic payments each month to avoid missing your deadline.
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KOHO Credit Building and Monitoring
Navigating the world of credit can be overwhelming, but KOHO is here to make the journey smoother and more understandable.
KOHO’s credit building service is designed as a user-friendly and accessible tool for anyone looking to improve their credit score, whether you're just starting out, repairing credit, or looking to maintain a strong score.
In addition to helping you build your credit with KOHO, we're excited to introduce an upcoming feature for monitoring and tracking your credit score. This new option is a proactive approach to credit management, allowing you to stay informed about your credit status and understand how your financial decisions impact your score.
Not sure how to find your credit score? Get a free credit score check today before applying for our free virtual credit card and overdraft protection coverage!
With KOHO's forthcoming credit monitoring feature, you'll have a convenient and efficient way to keep a close eye on your credit health, helping you to stay on the path to financial success. And, if you want to streamline your plans for spending and saving while making a return on your deposited money, check out KOHO's high-interest savings accounts!
Note: KOHO product information and/or features may have been updated since this blog post was published. Please refer to our KOHO Plans page for our most up-to-date account information!

About the author
Niki is a communications specialist with years of experience as a freelance and marketing agency content writer. With a knack for storytelling, Niki enjoys working with businesses from diverse industries to craft engaging content that resonates with target audiences worldwide.
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