Guest Written by: Rachel Surman, Borrowell.

Credit scores can be a little complicated. But the truth is – you need one for a variety of reasons! Credit scores play an important role in determining your creditworthiness. For example, those with higher scores are considered to be safer borrowers and are more likely to be able to access credit.

People with higher credit scores are also more likely to receive lower rates for financial products, such as mortgages or loans. Basically, having a good credit score can make life easier. If you’re new to credit scores, don’t worry – we’ve got you covered!

What is a credit score?

A credit score is a metric used by banks and lenders to assess your creditworthiness. It ranges between 300 and 900 depending on the scoring model. There are two different credit bureaus in Canada that calculate credit scores: Equifax and TransUnion. Borrowell uses the Equifax Risk Score 2.0 (ERS 2.0).

What goes into a credit score?

A credit score is calculated by weighing various factors on a person’s credit file. Credit bureaus use the following factors in credit score calculation:

• Payment history  (35%) – Do you make your payments on time?
• Credit utilization (30%) – How much of your available credit do you use?
• Length of credit history (15%) – How long have you been building your credit history?
• Public records (10%) – Do you have any court judgements, collections, or bankruptcies?
• Credit inquiries (10%) – Are you applying for new credit?  

As you can see, these different factors affect your score differently because they carry different weight. So, now that you understand what your credit score is and what goes into it, we wanted to give you an insider’s look into a few things that may be affecting your credit score that you may not know about. Here are 5 tricky things that you may not know affect your credit score!

1. Having more revolving credit than installment credit

You may be wondering what the difference is between revolving credit and installment credit. Revolving credit is automatically renewed as debts are paid off. The most popular type of revolving credit is a credit card. On the other hand, installment credit has a fixed number of payments, such as a personal loan or a mortgage.

Having a good credit mix is good for your credit score. However, having too much revolving credit may affect your credit score because of the potential damage it can cause. The second most important part of your credit score is your credit utilization – which is how much available credit you’re using. With revolving credit, it can be easy to rack up debt. That said, if you’re using your credit wisely, this shouldn’t be an issue.

2. Too many telephone company credit applications

When applying for a new phone and plan, you may be shopping around in order to get the best deal. But hold on – when you’re applying for these different services, most carries will run a credit check to evaluate your creditworthiness.

This is considered a hard inquiry.  When you check your credit score yourself,  it’s considered a soft inquiry and doesn’t affect your score. When you apply for too many mobile accounts, and rack up those hard inquiries, creditors will see it as a sign that you’re seeking too much  new credit.

3. Overdue tickets

Have a parking ticket that’s overdue? It could be causing major damage to your credit score! If it’s left unpaid long enough for it to go into collections, it may eventually find itself your credit report. A collections account can stay on your credit report for 6 years – which is something you definitely don’t want.

4. Closing your oldest credit account

Credit history makes up 15% of your credit score. This is weighed by how long your accounts have been open and how long it has been since you’ve been using those accounts. To create a solid history, credit bureaus would prefer a minimum of 6 months.

So, it’s important before you close a credit card account to research whether or not doing so will affect your credit history. If you’ve had one card for 10 years, and another for 5, your best option would be to close the 5 year account because it holds less credit history.

We understand that sometimes you need to close an account. Just be sure to make on-time payments on the new card and check your credit score regularly to ensure you’re not losing those hard earned points!

5. Applying for a credit limit increase

Applying for a credit card limit increase will usually trigger a hard inquiry from your credit provider. Credit issuer will look at things like if you have good credit, have a good payment history, and whether you’ve recently gotten a raise. If you’re in good financial standing, applying for a credit limit increase shouldn’t be an issue.

On the flip side, if you’ve taken a lower paying job, have had some issues with credit, or haven’t been making your payments on time – now might not be a time to request a credit limit increase! This is because you will sustain a hard credit check.

If your credit is a little iffy, it might make sense to wait until your bank offers you the limit increase.

The final word

Credit scores are fluid numbers that are meant to fluctuate over time. If you’re making on-time payments on your credit products, using less than 30% of the total credit available to you, and monitoring your credit score regularly – you should have nothing to worry about.

About the Author

This article was written by Rachel Surman of Borrowell. Borrowell helps Canadians make great decisions about credit through free credit monitoring, personal loans, and product recommendations. Borrowell empowers consumers to improve their financial well-being and be the hero of their credit. Over 400,000 Canadians have received a credit score through Borrowell – plus, Borrowell has launched full Equifax credit reports! Get your score and report today.

Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians, available now on Amazon and at Chapters, Indigo and major bookstores, and as an Audiobook on Amazon, Audible and iTunes.