What is a Credit Score? 

A credit score is a three-digit number that represents your creditworthiness, helping lenders assess the risk of lending to you. In Canada, credit scores are primarily issued by Equifax and TransUnion, while in the United States, the FICO score is the most common. Scores typically range from 300 to 900, with higher scores indicating lower risk to lenders, which can improve your chances of securing loans, credit cards, and favorable interest rates.  

Credit scores weren’t always the go-to measure for lending decisions. Before the mid-20th century, banks relied on personal judgment, making borrowing unpredictable. The introduction of standardized credit scoring changed everything, creating a system where data, not opinions, determined financial trustworthiness. Today, the average credit score in Canada is around 760, but it varies widely by age. Younger adults often struggle with lower scores due to limited credit history, while older individuals typically benefit from years of responsible credit use, unlocking better financial opportunities. 

Components of the Equifax Credit Score 

Understanding what contributes to your credit score can help you manage it more effectively. Here is the breakdown of the Equifax credit score*: 

Payment History (35%): This is the most significant factor. Timely payments on bills and loans positively affect your score, while late or missed payments can severely damage it. 

Credit Utilization (30%): This represents the ratio of your outstanding credit card balances to your total available credit. Lower credit utilization (ideally under 30%) is viewed more favorably, as it indicates you’re not overly reliant on credit. 

Length of Credit History (15%): A longer credit history shows lenders how well you’ve managed credit over time. This includes the age of your oldest account and the average age of all your accounts. 

Credit Mix (10%): Having a diverse mix of credit types, such as installment loans (including mortgages or car loans) and revolving credit (like credit cards), can be beneficial. 

New Credit/Inquiries (10%): Opening several new accounts in a short period can lower your score. Hard inquiries (lender-initiated with your consent) temporarily reduce your score, while soft inquiries (like checking your score online) don’t affect it. 

Why Your Credit Score Matters for Financial Health 

Loan Approval and Interest Rates: A high score boosts your chances for loan approval and lower interest rates, reducing overall borrowing costs, while a low score can lead to higher rates or loan denials. 

Credit Card Offers: Higher credit scores unlock premium credit cards with rewards, benefits, and lower interest rates. Zero-fee cards are great for building credit and fostering good habits, such as paying off balances monthly, while cards with annual fees may offer superior rewards if your spending justifies the cost. 

Housing: Whether you’re renting or buying, your credit score plays a crucial role in securing housing. Landlords may check your credit score as part of their tenant selection process, and your score will directly affect mortgage rates.  

Financial Security & Independence: A strong score grants access to low-interest credit for emergencies and improved financing for investments. 

Improving Your Credit Score 

Pay Bills on Time: Set up reminders or automate payments to avoid late payments. 

Reduce Debt: Pay down credit card balances to lower your credit utilization rate. 

Avoid New Credit: Don’t open new accounts unnecessarily, especially if you’re planning to apply for a significant loan soon. 

Check Your Credit Report: Regularly check for errors or fraudulent activities.  

Diversify Your Credit: If managed well, having different types of credit can help, but don’t force it. 

Length of Credit: Keep old accounts open to maintain a long credit history, unless there’s a compelling reason to close them. 

The Bigger Picture 

Your credit score reflects your financial discipline and stability, influencing various aspects of your life – from daily transactions to long-term goals. Understanding and managing your credit score is a fundamental part of financial planning and can lead to a healthier financial life. Remember, improving your credit score is a gradual process that requires consistent effort and patience.  

*https://www.equifax.ca/personal/education/credit-score/articles/-/learn/top-factors-that-affect-your-credit-scores/