Mortgage Basics

How Your Credit Scores Are Calculated

How Your Credit Scores Are Calculated
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  • Ashley Howard
| Sep 18, 2023
Reviewed, Sep 22, 2023
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    When you’re shopping for a mortgage, lines of credit or any other type of loan, potential lenders will ask if you know your credit score. Your credit score is a 3-digit number ranging from 300-900, which is important since it can impact your ability to borrow money. 

    When your credit score is requested, it will likely come from one of Canada’s 2 major credit reporting agencies, Equifax or TransUnion. Now you may be wondering, how is my credit score calculated? What makes it good or bad? 

    Whether you’re looking for a mortgage or just want to improve your credit score, read on as we explore the credit scoring system and what determines your credit score. 


    Key Takeaways

    • Your credit score is calculated based on a scoring model that weighs common components and will vary based on the company providing the score, the data, and the scoring calculation method.
    • Payment history, credit utilization ratios, types of credit, and length of credit history are all used to determine your credit score.
    • Regularly reviewing your credit report can help you quickly spot errors and help protect your credit score from potential fraud and identity theft.

    Are you a first-time buyer?

    How Your Credit Score Is Calculated 

    Credit bureaus use the information stored in your credit file to calculate your credit score. They do this using a scoring model that weighs common components, including payment history, credit inquiries, credit history, credit mix, and credit utilization ratios. 

    Your credit score can vary depending on the information used, the scoring formula used to calculate it, and the corporation that provides the score. 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. 

    A credit score isn’t based solely on your credit card accounts. Your monthly bills can affect your credit score, including your utilities, cell phone bill, car loan, student loan, credit card balances, etc. 

    In addition to the main credit bureaus, lenders, creditors, and other professionals may use your FICO score, provided exclusively through Equifax in Canada, when assessing your creditworthiness. Some lenders may use a blended credit score from all major credit bureaus or their own scoring model to calculate credit risk.

    What Drives Your 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

    The way you have handled your debts and paid on time is reflected in your payment history. Here, lenders want to see how you’ve handled credit in the past and answer whether you have made all your payments on time and managed debts responsibly.

    This history is a complete overview of all types of credit accounts, including credit cards, credit lines, retail and store credit cards, installment and term loans, auto loans, student loans, and secured facilities such as home equity lines of credit and mortgages.

    Payment history will also detail any of your credit facilities that have been delinquent in relation to all other accounts. Your credit history will also indicate whether you have previously filed for bankruptcy, had any accounts sent to collection agencies, experienced a property foreclosure, or had wage garnishments imposed.

    If you have a lengthy credit history of on time payments, this can help you establish a positive payment history and boost your credit score. Your credit score can be negatively affected by late or missed payments and defaults. 

    Used Credit vs. Available Credit

    Lenders and creditors will want to know how much of your available credit you are using before approving you for more credit. The credit utilization ratio measures the amount of credit you use compared to your available credit limit. You can calculate this by dividing your total revolving credit balances by your total revolving credit limits and multiplying the results by 100. 

    Keeping credit utilization at or below 30% is recommended to help maintain and improve your credit score. Lenders may view high credit utilization as a sign of financial difficulties. If you have a history of credit accounts nearing or consistently maxed out, it may signal that you are not a responsible borrower and cannot effectively manage your debt. This can negatively impact your credit score. 

    Type of Credit Used

    There are many types of credit accounts, including revolving debt, such as credit cards and lines of credit and installment loans, such as mortgages, auto and student loans, and personal loans. Having a diverse mix of credit products can help you improve your credit score as it shows that you can manage multiple and varying account types. 

    New Credit

    How old were you when you first applied for and used a credit card? Someone who has just started using credit, even if they are 50 and have a high earning income, won’t be able to prove to a lender that they can manage debt, pay bills on time, etc.  

    If you have a short credit history or are new to credit, your credit score is likely lower since less data is available to evaluate you. This can work against you when obtaining a loan or more credit. Responsibly building credit over a longer period of time or as soon as you can at a young age helps build a stronger credit profile.

    Length of Credit History

    Credit score calculations may consider the length of your credit history when determining your overall score. Having a lengthier credit history gives lenders more data to evaluate your creditworthiness. They will look at how long different credit accounts have been active and consider how long your oldest account has been open, as well as your most recent accounts. A longer credit history allows lenders to better assess how you effectively manage credit. 

    Personal Information in Your Credit Report

    When a lender or credit card company goes to pull your credit score, your credit reports across credit bureaus may contain the following:

    • name,
    • date of birth,
    • current and previous addresses, including postal code,
    • current and previous telephone numbers,
    • social insurance number (SIN),
    • and employment history.

    The integrity of information in your credit report will depend on the past information you’ve provided whenever you have applied for credit or reached out to the credit reporting agencies. 

    For instance, you can refuse to provide your SIN when applying for credit. Still, by providing your SIN, you’ll ensure that your new credit facility is registered on your credit file and not someone else with the same/similar name, date of birth and postal code. This is especially true in larger cities with high-rise multi-residential towers where many share the same postal code.

    What Is The Difference Between A Hard Credit and Soft Credit Inquiry?

    A credit inquiry will be conducted whenever you apply for credit, are pre-approved for credit, or need a credit check for a potential employer. There are two types of credit inquiries: hard and soft. One will affect your credit score, and the other will not. 

    What is a Hard Credit Inquiry?

    A hard inquiry occurs when a lender, such as a credit card issuer, checks your credit history in response to a credit application. This happens whenever you apply for a new credit card, car loan, personal loan, mortgage, and sometimes even rental applications. 

    Your credit score will be negatively affected by the presence of hard inquiries on your credit report. If too many hard inquiries are made, this can significantly lower your score. That is why applying for multiple credit products in quick succession is generally not recommended. Too many credit applications at once could raise red flags, with lenders questioning why you need access to credit so quickly. 

    When shopping for a mortgage with multiple lenders or brokers, it’s important to note that as long as all hard inquiries are completed within a 45-day period, this will only count as 1 hard inquiry (credit hit) on your report. Credit agencies take into account the nature of business activities of certain professionals, such as mortgage lenders, brokers and agents, knowing that their clients are likely to shop around before settling on one. 

    What is a Soft Credit Inquiry?

    A soft inquiry occurs whenever you check your credit report, are pre-approved for credit facilities or an increase to your credit limits, insurance providers check your credit to determine risk or before offering discounts on your premiums, or when a potential employer performs a credit check before offering employment. 

    Soft inquiries do not affect your credit score and do not show up in your credit report. A soft credit inquiry only looks at your last 3 years of credit repayment history and does not provide your full credit history, whereas a hard inquiry does.  

    nesto uses a soft credit check (pull) in its pre-qualification process to protect your credit. However, if you want to proceed with your application and have submitted all documents, a hard credit inquiry will be performed within 30 days of mortgage approval. 

    Note: It is not possible to arrange a mortgage in Canada without providing consent to a potential lender to access your full credit history.

    Here’s Why Your Credit History Is So Vital

    Your credit history and credit score are vital because they influence your ability to obtain credit. Your credit score may even influence the interest rates offered to you when applying for a mortgage

    Higher credit scores indicate to lenders that you are a lower risk, making you more attractive. A higher credit score will make obtaining credit easier and help you get the most competitive rates. Lower credit scores indicate to lenders that you may be riskier to lend money, which could limit your access to credit or result in higher interest rates. 

    Who Creates Your Credit Report and Credit Score

    Consumer reporting agencies Equifax and TransUnion create and maintain credit reports. They are private companies that collect information from creditors about your financial history in Canada. They then store and share this information about how you use your credit when requested. Most provinces in Canada have credit reporting legislation to safeguard your information that outlines who can access your report and how they can use that data. 

    Who Can See and Use Your Credit Report

    In most provinces, the law requires you to consent before a reporting agency shares your credit report. A credit report can be shared with any of the following:

    • Banks, credit unions and other financial institutions,
    • credit card companies,
    • car leasing companies,
    • retailers,
    • mobile phone companies,
    • insurance companies,
    • governments,
    • employers and prospective employers,
    • and landlords and prospective landlords

    FAQs on How Credit Scores are Calculated

    What is considered a good credit score in Canada?

    Credit scoring will vary based on the company, but in general, you are considered to have a good credit score if it is within 660-724. If your credit score is 725-759, that’s considered very good, and anything 760 and above is considered excellent.

    How does applying for a mortgage affect my credit score?

    Once funded and registered on your credit file, a mortgage typically takes away up to 100 points from your credit score, though you can recover those points over the next 6 months as you begin making payments. As soon as you have an established history of making timely payments, this will increase your credit score, positively impacting your credit report.

    How often do I need to check my credit report?

    It’s recommended that, at minimum, you should check your credit report at least once a year. This has been made more accessible in recent years as most financial institutions provide this service to you for free on their online banking website or app, so it may be a good idea to check more frequently. This will help you keep tabs on your credit score in case any issues like fraud or reporting errors arise that could negatively affect your score.

    Final Thoughts: Keep Your Credit Healthy

    When it comes to your credit score, the most important thing to remember is to monitor it regularly. This way, you can quickly notice if something doesn’t look right, making it easier to identify errors in reporting or more serious issues like fraud and identity theft, which could negatively impact your score. Keeping a close eye on your report and addressing any problems will help you maintain a healthy credit score. 

    Knowing what areas make up your score and learning how to utilize credit and pay it off responsibly is important to build and maintain good credit. Making smart decisions now to keep your credit healthy can help you access credit more easily and may even get you a better interest rate on your mortgage


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