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Building credit is hard, but so is maintaining it. This is why it’s so important to understand not only how credit scores are calculated but also the financial habits that can negatively impact your credit.

What Are Credit Scores?

Credit scores are 3-digit numbers between 300 and 900 that are calculated based on the information in your credit report. It represents your likelihood to repay a bill on time. Credit scores above 660 are considered good to excellent while credit scores below 560 are considered poor. 

What Factors Can Impact Your Credit Scores? 

Your credit scores can be impacted by two major factors: the information reported to the credit bureaus and the credit scoring model used to calculate your credit scores. 

Information Reported To The Credit Bureaus – Not all lenders and creditors report your credit information to both credit bureaus. Some only report to one, while others report to none. The credit reporting discrepancy can therefore affect the way your credit scores are calculated. 

Credit Scoring Model – Similarly, there are many different credit scoring models. Some models place more emphasis on your payment history while others may put more emphasis on your debt-to-credit ratio. Others may even calculate your credit score without including certain tradelines in your credit report like cell phone bills. 

That said, there are five common factors that are typically considered in the calculation of credit scores. This includes payment history, credit utilization, credit length, public records, and new credit inquiries. 

Payment History

Payment history generally accounts for about 35% of how a credit score is calculated. By consistently paying off your credit cards and loans in full and on time, it can help build a positive payment history

What Can Affect Your Payment History?

  • Bill Payments – The way you manage your bill payments is key to developing a good payment history. However, if you have a lot of late or missed payments, it can negatively affect your credit scores. 
  • Time Since A Negative Event – Late and missed payments can stay on your credit report for up to 2 years. More recent negative events may have a negative impact on your credit.

Debt-To-Credit Ratio

Your debt-to-credit ratio is determined by how much of your available credit limit you use. For example, if you have a credit card with a $1000 limit and you charge $500 worth of purchases to it, your debt-to-credit ratio (or credit utilization) will be 50%.  Your credit utilization usually counts for 30% of the calculation of a credit score.

What Can Affect Your Debt-To-Credit Ratio?

  • Credit Card Balance – If you constantly use up all your available credit, it can look like you might have trouble repaying it and can negatively impact your credit scores. Most lenders like to see a ratio of 30%. 
  • No Credit Utilization – Lenders want to see that you can pay back the money you borrow. While carrying too much debt is never a good idea, if you don’t use credit at all you won’t be able to build a healthy credit history.

Credit History 

Credit history (or credit length) refers to how long you’ve been using credit. It typically counts for 15% of a credit score. The longer the credit history, the more likely it may positively affect your credit scores.

What Affects Your Credit History?

  • Closing Old Accounts – Closing an old credit account like a credit card can negatively impact your credit scores because when you cancel an old credit card, you’ll be reducing the average age of your credit accounts. 
  • Opening New Accounts – Similar to closing an old account, opening a new credit account also affects the average age of your credit accounts. As such, opening new credit accounts may temporarily negatively impact your credit scores.

It’s always a good idea to keep your older credit accounts open and active. If you want to reduce the number of accounts you have to manage, it might be better to close the newest ones if possible.

Check out how a decrease in credit card credit limits can impact credit scores.

Public Records

Public records usually account for approximately 10% of your credit score calculations. Public records include bankruptcies, liens against properties, lawsuits, debt collections and other derogatory remarks.  

What Affects Your Public Record?

  • Debt sold to collections – To a potential lender, a credit account that’s been sent to collections looks like you aren’t financially responsible enough to handle debt. Moreover, debts in collections may receive an R9 credit rating which is the lowest credit rating. 
  • Items of public record – Bankruptcies, lawsuits, debt settlements, charge-offs, foreclosures, wage garnishments, public judgements, and liens are other public records that may be reported on your credit report. These all look bad to a lender and can negatively impact your credit scores.

Credit Inquiries

Whenever you apply for more credit, lenders usually check credit information by doing what’s called a “hard inquiry”. These can lower your credit scores. Credit inquiries count for 10% of a credit score.

What Affects Your Credit Inquiries?

  • Hard and soft inquiries – Hard inquiries may affect your credit scores temporarily, but soft inquiries, like retrieving your own credit information, do not. 
  • Multiple inquiries – Since a hard inquiry happens whenever you apply for new credit, multiple inquiries within a short amount of time can make it look like you’re a high-risk borrower. The reason for this is that a potential lender may think you’re taking on too much debt or have been rejected by many other lenders.

We recommend you try not to apply for a lot of new credit at once to avoid too many hard inquiries on your credit report.

Check out the 7 entities who can check credit

Can Cell Phone Accounts And Other Service Bills Affect My Credit Scores?

Cell phone accounts, utility bills and other service accounts may or may not affect your credit scores. Generally, service accounts only end up on your credit report if you missed a payment or if your account was sold to a collection agency. However, more cell phone providers have been starting to report both on-time and missed payments. Meaning cell phone bills can affect your credit scores both positively and negatively, however, it ultimately depends on the credit scoring model used.

Can Your Income Level Affect Your Credit Scores?

It might be interesting to note that even though reduced income can reduce an applicant’s chances of securing a loan, it has no impact on their credit scores. This is because reduced income affects the debt-to-income ratio, which is one of the most important factors that lenders consider. However, your income may have an indirect impact on your credit as a reduced income can affect your ability to make payments (which can affect your payment history).

Don’t Forget To Check Your Credit Report For Errors

Errors in your credit report may also have an impact on your credit scores. According to a CBC article, almost 20% of people find inaccuracies in their credit reports. This can often lead to rejections for different financial services. Some common errors to look out for include:

  • Personal Information – your address, phone number, date of birth are all common mistakes you may find.
  • Credit Account Information – Sometimes, creditors may report your payments as missed even though they were paid on time. Be sure to double check your payment information, balances and whether all credit accounts are properly listed.
  • Check For Fraud – If you notice an account that is not yours listed in your credit report, it may be a sign of identity theft. If this happens be sure to report it to the Canadian Anti-fraud Centre and your credit bureaus. Don’t forget to add a fraud alert to your account.

FAQs On What Affects Credit

Will multiple loan applications affect my credit?

Multiple hard inquiries within a short time period can cause credit scores to fall because it suggests that said consumer is rushing to secure credit for an urgent need, which is rarely a good sign. 

If I stop using my credit card, will it affect my credit?

Choosing to stop using your credit card for a short period of time can help you reduce your outstanding balances and bolster your finances. But simply refraining from using your credit card may have no impact on your credit scores. However, if you cancel your credit card it could impact your credit history, which is a common factor used when calculating your credit scores. 

Can getting married affect my credit? 

The act of getting married has no impact on the consumer’s personal credit scores.  Though it can influence their chances of securing a joint loan. It is important to note that joint credit can affect the credit scores of both spouses because both are considered responsible, but the same is not true of debt held by only one of the spouses.

Can Debit Cards Affect My Credit Scores?

Debit cards draw on existing bank balances rather than existing lines of credit, as such, using them has no impact on your credit scores. While debit cards are an excellent tool for people interested in controlling their spending, it cannot help build credit.

Bottom Line

Building and maintaining credit is important. A poor credit history can limit one to lenders that only offer financing with high costs of borrowing. Maintaining good credit history can help increase access to more affordable credit. As such, understanding what impacts your credit is key to building and maintaining good credit. 

Matthew Taylor avatar on Loans Canada
Matthew Taylor

Matthew joined the Loans Canada writing team in 2021 while was finishing up a Bachelor's degree at the University of Saskatchewan. It was there that he discovered his love of writing. His work has appeared in several publications, including the Canadian Student Review and In his spare time, Matthew enjoys reading, geocaching, and spending time with his family and pets.

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