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The all-knowing credit score seems to be on everyone’s mind lately. What does it mean? Is it high enough? How will it affect my life? Can I improve it? The questions are endless and the answers are sometimes even more endless.

Actually, a credit score is three digits. In some cases, it is as important as your social insurance number. You need to educate yourself and make sure that you understand that’s going on, especially when it comes to your credit score.

Your credit score tells lenders how you manage debt. Debt in this case is money that you borrow and have to pay back with interest.

Simply put, your credit score shows potential lenders the likelihood that you can pay back a personal loan or new credit. Your creditworthiness in the backbone to your future financial success.

There are 5 factors that influence your credit score. Understanding each of these factors individually will help you better understand why your credit score is what it is.

Payment History

Payment history is one of the most important factors what determines your credit score. Your payment history reflects your ability to make payments on your credit cards and other loans on time. Failure to pay several payments or constantly late payments will negatively affect your credit score.

Potential lenders or creditors are looking for people who are responsible with their money. If they see that you could not make payments in the past they won’t trust your future ability either.

Your credit history is the key to your credit future. Therefore making timely payments has be a top priority for everyone with loan or credit payments.

Debt Usage

If your credit cards are constantly maxed out then your credit score will absolutely be affected in a negative way. Using your credit cards isn’t a bad thing; it’s when you use them too much that it becomes a problem. Down the line when you’re looking for more credit, a loan or even a mortgage the people who will need to check your credit score want to see that you’re responsible with your credit cards. The ratio between your available credit and the credit you’re actually using should be low. Try keeping your balance to less than 10% of your available credit.

If you have trouble with over charging your credit cards and you think it’s negatively affecting your credit score then you need to create yourself a repayment plan and start as soon as possible. You can improve your credit score but it will take a lot of time and hard work so the sooner you start the better.

Your Credit’s Age

The age of your credit accounts is definitely something that is taken into account when your credit score is calculated. The longer you’ve been able to maintain active and healthy credit accounts the better. It’s in your best interest to hold onto your first credit card and continue to use it in a responsible way. The history of your credit accounts shows future potential lenders how responsible or irresponsible you are with your finances. If you have older credit accounts that you don’t use anymore or if you think you have too many credit accounts it’s in your best interest to keep them open, they paint a story of your credit history and that’s a valuable thing to have.

Inquiries for New Credit

If you’re applying for new credit on a pretty regular basis then you are potentially hurting your credit score. Once you apply for a loan or a new credit account you are giving your potential lender the authorization to check your credit report. Every time someone who is not you requests a copy of your credit report it is called a hard inquiry, these hard inquiries are noted on your credit report and therefore are taken into account when your credit score is calculated. Too many hard inquires is a technically a bad thing, it means that you are being rejected for new credit on a regular basis which shows that you are probably having a hard time handling your financial situation.

Mix of Credit Accounts

The final factor that plays an important role in the calculation of your credit score is the variety of types of credit accounts you currently have open. If you only have one or two credit cards then that’s not necessarily a bad thing, but it’s always better to have several different kinds of credit accounts. This means an installment loan, a mortgage or a car loan. Variety is better, so once you have the opportunity to get different kinds of credit accounts your credit score will be improve.

Credit scores can be extremely complicated to understand but if now that you know the basics and understand the five main factors used to calculate them you should be on your way to taking hold of your finances.

Caitlin Wood avatar on Loans Canada
Caitlin Wood

Caitlin Wood is the Editor-in-Chief at Loans Canada and specializes in personal finance. She is a graduate of Dawson College and Concordia University and has been working in the personal finance industry for over eight years. Caitlin has covered various subjects such as debt, credit, and loans. Her work has been published on Zoocasa, GoDaddy, and deBanked. She believes that education and knowledge are the two most important factors in the creation of healthy financial habits. She also believes that openly discussing money and credit, and the responsibilities that come with them can lead to better decisions and a greater sense of financial security.

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