The credit scoring system in Canada uses ratings between 300 and 900 to assess a consumer’s creditworthiness. Your rating is considered “good” if it tops 660.
You might be wondering what factors go into determining your rating, good or bad. What should you avoid doing? What can you do to improve your rating?
We put together this guide to help you understand what lowers your credit score. With this advice, you can focus on building a better credit rating.
The Credit Rating System in Canada
Credit reports are prepared by TransUnion and Equinox, the Canadian version of Equifax. The scoring is a little different than the FICO system used in the United States.
In Canada, your score can range between 300 and 900, with 660 and above being considered “good” scores. The higher your score, the easier you’ll be able to access credit.
If you have poor or bad credit, on the other hand, you may be denied loans and credit cards. If you score under 620, you’ll probably have a more difficult time accessing credit.
Building a Credit Report
So, what factors do these credit bureaus use when they decide someone’s rating? There are a few different things they’ll consider.
The first is payment history. The bureau looks at how often you’ve paid credit cards and other loans on time.
Next is credit utilization. The bureau looks at the percentage of available credit you’ve used.
They’ll also consider your history more generally. The longer your history, the better. This gives the bureau and lenders an idea of how you have handled debts in the past.
Inquiries on your account also affect your score. If you’ve applied for several loans recently, you may see a change in your score.
Finally, the Canadian bureaus also consider the type of credit products you’ve held. Credit cards “count” for more, because they come with more risk. The use of your credit card affects your rating more.
What Lowers Your Credit Score?
Now that you know which factors the bureau is looking at, you want to know what lowers credit score on your credit report.
Actions tied to any of the factors the bureau is considering will raise or lower your score. If you pay off a loan, for example, your credit utilization changes.
So, what hurts your credit score?
The biggest factor is your payment history. Late and missed payments hurt your credit score quite a bit.
Using too much of your available credit will also cause your score to dip. If your credit limit is $500 and you use the full $500, the credit bureau will rate you lower.
Inquiries on your account can also lower your credit score. If you apply for several loans at once, you’ll likely see a temporary dip in your credit score.
Your history can also count against you. If you’ve defaulted on a loan or have a lengthy history of missed payments, your credit score will take a dive.
Finally, the credit product type also matters. If you have several credit cards, your credit score may be lower than if you have one credit card and a couple of loans.
What about no History?
What happens if you’re trying to get your very first credit card or loan? You may think you should have a clean slate.
Lenders actually see your lack of history as a risk. They don’t know anything about you, so you may or may not be able to pay.
Building credit history is important for this reason. Even if it’s just $500 on a credit card or a small payday loan, you can start building credit with these products.
Risk Management for Lenders
Why do these actions hurt your credit score so much? The underlying reason here is risk.
Your credit score tells lenders how much of a risk you are. If you have a high credit score, the lender’s risk is low. If your credit score is low, there’s a good chance the lender isn’t going to get their money back.
The level of risk is reflected by what lowers credit scores. A consumer who constantly misses payments is riskier than someone who makes all their payments on time.
Similarly, someone who has maxed out all their credit is at a higher risk of defaulting than someone who still has credit to use.
Credit cards are riskier than installment loans and mortgages. Loans come with set monthly payments. Credit card payments are variable, which means people are more likely to miss a payment.
Many inquiries on your account also make you look like a higher risk. If you’re applying for lots of credit, lenders assume something bad has happened. They may worry you’re taking on too much debt and won’t be able to pay it all back.
Improving Your Credit Score
Now you know what lowers your credit score. How can you improve your score?
The same factors that can lower your credit score can also increase it too. Usually, you raise the score by doing the opposite of what you did to lower it.
Making all your payments on time is a great way to start improving your credit score. Even paying part of your credit card bill on time can help improve your score.
Paying down your debts also helps. This lowers your credit use, which will improve your score.
Having a good mix of credit products can also give your score a little boost. Credit cards might be easy to get, but they’re also one of the riskier forms of credit. Think about getting loans, credit cards, and lines of credit.
We already mentioned the importance of building credit history. Small loans and low credit card limits can help you build a credit history. You should also review your report from time to time and contact the bureau to have old or mistaken information removed.
Finally, try to spread out loan applications. That way, you’ll only have one inquiry on your account at a time.
Improving Your Credit is Simple
A bad credit score doesn’t have to be an issue. Now that you know what lowers your credit score, you can work on improving your score.
A small, short-term loan can help. If you want to explore your options, get in touch with us today. A good credit rating can help you achieve your financial goals.