#FinancialFridays: Credit Score Formulas

What is a credit score?

A number that sums up all the information in your credit report. It is used to measure risk – the risk to the creditor that you might not repay your credit as agreed. 

Creditors, like banks, credit card companies, car financing companies, and landlords, will look at someone’s credit score, along with other information, to decide if they will give you credit and at what interest rate, or if they will rent you an apartment. 

A credit score will be a number between 300 and 900 or 0. A higher score – a score closer to 900 – is seen positively by creditors. If it is 0, it is because the credit bureaus don’t have enough information yet to give you a rating. 

Credit bureaus – In Canada, there are two, Equifax and TransUnion, which use mathematical formulas to decide on your credit score. There are basically 5 things they use in the formula and the different categories are weighted differently in the formulas. ie. Your credit scores from Equifax and TransUnion may be different. 

  • Payment history – This factor carries the most weight. This shows whether you repay your debts on time. Paying bills late or having unpaid debts sent to collections will lower your score. 
  • Amount you owe – This factor compares the amount of debt you have to the amount of credit you have available. Trying to keep your amount of debt below 50% of your credit limit will help your score. Keeping it below 30% is seen as even better. 
  • Length of credit history – This factor looks at how long you have been using credit. It can help your score if you keep accounts open that you have had for a long time. 
  • New credit and inquiries – Every time you apply for new credit, the creditor requests your credit report from a credit bureau. This is called an ‘inquiry’. If there are a lot of inquiries on your report, it can lower your score, especially if the inquiries are all close together. Creditors may wonder why you are applying for so much credit at once. 
  • Types of credit – Having different types of credit can improve your score. Different types of credit mean credit cards, lines of credit, car loans, mortgages, and student loans. It shows the creditor how you manage different forms of credit. 

The two top factors – payment history and amount you owe – are weighted the highest, so making payments on time and lowering your overall debt compared to your credit, will make the biggest difference in improving your credit score. 

Other things that can affect your score include having accounts sent to collection agencies and if you have filed a consumer proposal or bankruptcy. 

Checking your own credit score will not affect your score.