What is a credit score?

A credit score is a statistical formula that translates personal information from your credit report and other sources into a three-digit score. For example, when you fill out a loan application, pieces of information from the application along with information from your credit report will be used to compute a score that indicates to the lender the statistical probability that you will become delinquent on the loan.

Some scores that lenders use are based strictly on the data in your credit report; these are known as "bureau scores". The most widely-used bureau scores in Canada were developed by Fair, Isaac and Co., headquartered in San Rafael, California.

It is important to understand that a credit score is only one criterion that most lenders will use in making decisions. For example, in mortgage lending, the lender will take into account the property being purchased and the homeowner's equity. Many lenders look at their relationship with the customer, which may include other financial services. Each lender will have its own policies and you should feel comfortable asking a credit institution about these. Our work with credit grantors has shown us that most lenders want their customers to have a better understanding of their lending processes.

What is used to calculate my score?

Note: Both agencies in Ontario use proprietary calculations based on the Fair Isaac Credit Scoring System to determine your credit score and there can be differences between the two. In addition not all lending institutions update both agencies causing further differences. Here is a general guideline to how your credit score is calculated.

 Payment history (35% of your score) - Your payment history, especially the last three years is used. If you have made any late payments on your credit cards, car payments, and line of credits then your score may suffer. If you have gone to counselling, dealt with collections, or filed bankruptcy then your score will really suffer.

Credit utilization (30% of score) - The credit balance of your available credit impacts your score. If you use 50% or more of your available credit then your score may suffer. For example, if your limit on your line of credit or credit card is 10,000 and you have borrowed more than 5,000 then your score will suffer.

Length of History (15% of your score) - How long your credit cards and loans have been in use. Most lenders look for a minimum of 2 years established and clean trade lines from at least 2 different providers. If you have no credit lines and credit history the bureau may not be able to provide a score.

Inquiries (10% of your score) - Soft inquiries vs. hard inquiries. Soft inquiries include utility, rental checks, etc and don't impact your score. Hard inquiries are done by lenders when you apply for a loan, has an impact on your score, and stay on your record for 2 years.

*Note: Any Mortgage information that may appear in your credit report is not used to calculate your credit score.