The Truth About Your Credit Score - The Number That Defines You

At every point in your life, you are somewhat defined by a number.  In school, it was your grade - "I'm in grade 2!"; in high school, it was your age - "this isn't fair, i'm 16 years old"; in university, it was your student number - you don't even need to fill out your name on forms, just your student number (hands up if you still remember yours!).  Now, in the adult world, it's your credit score.  Stellar credit is an accomplishment, it's a golden star to show that you're doing a great job.  On the flip side, "tender" credit can pose obstacles that can really make life harder.  You're defined by a number between 300 and 900, and that is the final word with things like getting a line of credit, leasing a car, or getting a mortgage for your home.

A score of 680 or higher is considered 'A' credit.  You will likely have no problem getting approved for credit cards, lines of credit, car leases, etc...  In Canada, 58% of our populations has credit scores of 700 or higher, and only 15% of Canadians have scores lower than 600.  Needless to say, we are a very responsible country.

Have you ever wondered exactly how your credit score is calculated?  Your credit score is based on a FICO (formerly Fair Isaac) scoring model.  FICO is a company founded by engineer, Bill Fair, and mathematician Earl Isaac.  The two developed and patented the scoring system used across Canada and the US.  This is the breakdowns of this system:

Payment History:  Your payment history constitutes for 35% of your score.  Have you paid on time?  Late payments are recorded in 30/60/90/120 day increments.

Balances:  The balances on your trades account for 30% of your score.  Are all of your trades maxed out? Are all of your balances 0?  This can get a little tricky - people always think that keeping their balances at 0 will optimize their credit score.  In fact, it does the exact opposite.  Creditors want to see that you can handle responsibility on a constant basis, that you are responsible enough to budget your money.  The best way to optimize your balance is to keep your trades at a 60% usage constantly; for example, if you have a credit card with a limit of $1000, keep a constant $600 balance.

Account History:  Your account history represents 15% of your score.  How long have your accounts been active?  Trades with longevity are preferred over completely new credit.

Inquiries: Excessive inquires on your credit attributes to 10% of your score.  'Shopping' your credit score reflects negatively on you, because it shows that you are really trying to gain credit.  For example, if you are looking to lease a new car, decide what vehicle you want first before applying.  If a creditor sees Honda, Mazda, Nissan, Ford, and Toyata all having hits on their bureau, it looks as if no one approved them, then they start to wonder why.  Only apply for credit if, a) you are fairly certain you will accept the credit once it's granted, and b) if you are fairly certain you will be approved for what you applied for.

Type of Accounts: The type of accounts you maintain make up the last 10% of your score.  You should have a blend of instalment and revolving accounts.  An instalment trade is one where your monthly payment is constant, ie. a car loan.  A revolving account is one where your monthly payment is dependant on your balance, ie. a credit card.  Creditors want to see that you can maintain both types.


I highly recommend you order your credit report at least once yearly - if you order a personal report through Equifax or TransUnion, you only receive a 'soft hit' on your bureau.  This does not negatively affect your inquiries.  Review your report and ensure that your creditors are reporting accurately and consistently.