Mortgage Basics

How Your Credit Scores Are Calculated

How Your Credit Scores Are Calculated


If you’re shopping for a mortgage (or any loan, for that matter), chances are the credit rep at your bank will ask you if you know your credit score. Don’t worry if you don’t. After all, it’s not something most people know off the top of their head, like their height, or their weight, or their age.

Your rep will send a request to one of Canada’s three major credit bureaus: EquifaxExperian, and TransUnion. When the rep receives your score, he will likely give you the number and tell you if it’s good or not.

But how is this credit score calculated? What makes it good or bad? Well… it’s complicated! 

For obvious reasons, the major credit bureaus don’t reveal the exact formula they use to come up with your credit scores. If they did, it would make it too easy for anyone to cheat and game the system.

Here’s what we do know:

Agencies use the information stored in your credit file to calculate your credit score (or credit rating). Among the many factors they use to calculate your score are your payment history, the amount of debt you owe, and how long you’ve been using credit.

Some folks think a credit score is based only on credit cards. That’s wrong. Many of your monthly bills can affect your credit score: your cell phone bill, your car loan, your student loan, etc.. You can’t keep anything from them. No secrets, remember?

Your credit scores will vary according to the company providing the score, the data on which the score is based, and the method used to calculate it.

Credit scores provided by Canada’s major credit bureaus may also vary because not all lenders and creditors report information to every major credit bureau. While many do, others may report to two, one, or none at all.

In addition, the credit scoring models among the three major credit bureaus are different, as well as those used by other companies who provide credit scores, such asFICO or VantageScore.

The types of credit scores used by lenders and creditors may vary based on their industry. If you’re getting a loan for a car, an auto lender might want to compare apples to apples. They will then use a specific credit score which places more emphasis on your payment history with regards to auto loans.

Some lenders may also use a blended credit score from the three major credit bureaus.

There are many factors typically considered when calculating a credit score.

Depending on the scoring model used, the weight each factor carries may vary. Here is a general breakdown of the primary factors used to calculate your credit score.

Payment history

Here, the lender is mainly trying to answer a simple, yet crucial, question: “If I extend you credit, will you pay it back on time (if at all)?” To find out, they will take your payment history into consideration – among other things. They want to see how you’ve handled credit in the past. Have you made your payments on time? Or have you been constantly late?

Again, this is not limited to mortgages. It includes ANY AND ALL credit provided to you: credit cards, retail store credit cards, instalment loans, auto loans, student loans, finance company accounts, home equity loans and mortgage loans.

Your credit history will also detail how many of your credit accounts have been delinquent in relation to all of your accounts.

Let’s say you have 20 credit accounts, and you’ve had a late payment on 10 of those accounts. That high ratio (50%) may negatively impact your credit scores.

In your payment history, lenders will also see if you’ve ever gone bankrupt, if a lender has ever foreclosed on one of your properties, if you have wage attachments, and if any of your accounts have been reported to collection agencies.

I’ve said it before, but it bears repeating: there are no secrets. If there’s anything related to your prior credit, even one single late payment, you can bet it will be in your file.

Used credit vs. available credit

Lenders and creditors want to know how much of your available credit you are using. They like to find out if you use the credit made available to you responsibly. Do you pay your bills on a regular basis? Having a mix of credit accounts that are “maxed out” or near their limit will more than likely negatively affect your credit score.

Type of credit used

There are many different types of credit accounts out there, including revolving debt (such as credit cards) and instalment loans (such as mortgages, home equity loans, auto loans, student loans and personal loans).

Lenders and creditors want to know if you’re capable of managing multiple accounts of different types. If you have different types of accounts, and you use them wisely, they will be reassured, and your score will rise.

New credit

How old were you when you first used a credit card?

Someone who just started using credit, even if they are 50 and have lots of revenue, won’t be able to prove yet to a lender that he or she can handle credit, pay bills on time, etc. This may work against them when it comes to obtaining a loan.

To responsibly build credit at a young age helps build a strong credit profile. 

Length of credit history

Here, lenders and creditors find out how long different credit accounts have been active. Credit score calculations may consider both how long your oldest and most recent accounts have been open. Generally speaking, lenders and creditors like to see that you have a lengthy history of paying off your credit accounts, responsibly and on time (ideally).  

What is a hard inquiry?

A “hard inquiry” occurs when lenders and creditors check your credit in response to a credit application. If too many hard inquiries are made on your behalf, your credit score could be affected negatively. The same does not hold for soft inquiries.

In order to protect your credit, nesto uses a soft pull in its qualification process. Not only do you get to see your credit score for free, you can also rest assured that this will never affect your score.

If a lender or creditor who you have an existing account with does a periodic review of your credit report, your credit scores will not be affected. Checking your own credit also won’t affect your credit scores.

Keep It Healthy

When it comes to your credit scores, the most important thing to remember is to keep it from getting out of hand. Pay your bills on time. Don’t stockpile credit cards. And don’t bite off more than you can chew.

If you make smart decisions and keep your credit life healthy, the results will show in your credit score, which will help you get a better rate on your next mortgage transaction. 

Ready to get started?

In just a few clicks, you can see our current rates. Then apply for your mortgage online in minutes!