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Credit Scores

8 min read          By Susan Lam

A credit score is your adult financial report card that measures your credit worthiness in financial services. It ranges from 300 - 900 and the higher the better! How a credit score is calculated is based on various factors. The three most important areas are credit history, credit payment history and credit utilization. Master all three, and you should have a strong score!

How are credit scores calculated?


A credit score is comprised of 5 areas, each factor weighing a different percentage of your total score:


Credit History

Credit history depicts how long you've had credit for. You should start building your credit history as soon as you are of age, and ideally when you get your first job. The longer you’ve had credit and use it responsibly, the more established your credit will be.

Credit Payment

Credit payment history means exactly what it is, how you pay back the credit you use and if it's paid back in a timely manner. This means do you pay back ALL or just your minimum payments? It is important to pay your credit bills on time because if you are late for more than 30 days, it has a negative impact on your score.

Credit Utilization

Credit utilization means how much of your available credit you use. It is recommended to never go over 30% of your overall credit availability. For example, if you only have one credit card with a $1,000 limit, and you used $900 of that card, that means you have used 90% of your credit utilization. 

A few other areas that have an impact - both positive and negative - on your score are the types of credit you have, how many times you pull your credit (inquiries), and if you have bad debts such as collection items and public records.


Credit scores can fluctuate every 30 days - it can go up or down based on your credit usage. For example, if you miss a credit card payment and haven’t paid in 30 days, it will appear on your credit history as a missed payment and have an impact on your score. Another example is credit utilization, if you constantly carry a larger balance, then your score might be lower because of the debt you are carrying.


Another important factor that is not discussed often is this: you should never close your first credit card. Why is that? Your first credit card is a big part of your credit history because it would be the longest tradeline you own under your name. It helped you grow your credit score, track your credit habits since you started having credit and shows when you first started using credit. If you close your longest credit card without establishing/building another credit history, you are essentially “closing” that history off, thus hitting ctrl + alt + del on your credit history!


Essentially, your credit score is a balancing act of all the above factors testing your ability to use credit responsibly. 

Why do I need a credit score? 


I am asked this question often and there really is one answer and a long explanation - you need it. You just do. It’s how financial services are offered to you, it helps determine whether you can borrow larger amounts in the future to buy a home and essentially shows if you are a responsible borrower. A credit score even impacts how a lender like me offers interest rates. There is a high chance that if you have a bad score, your interest rates are much higher when it comes to borrowing. And if you have a good score, usually the best rates are offered to you to reward you for that.


Always Pay Your Bills On Time


It is that simple. Pay back what you owe on time. For credit cards, you usually have a 21-25 day grace period where you do not pay any interest and then a payment due date.


For credit lines or lines of credit, usually the payment is due on the first of the month. The “minimum payment” for credit lines is usually the “interest only” payment. Be smart and continue paying off the entire or larger amount than the interest only payment.

Pay more than your minimum payment.


Or better yet, always pay off the entire balance! If you cannot pay off the entire balance, it’s important to pay at least the “minimum payment”. Just know that whatever balance you carry over to your next billing cycle, you’ll be paying interest on that amount.

30% utilization and nothing over!


Your credit utilization plays a big factor in your credit score. It is recommended to never go over 30% of your available credit. If you do go over 30% because of unexpected expenses or such, you can always make multiple payments to your credit card in a month so one large payment doesn’t hurt the bank that much. Basically, it’s never a good idea to max out your credit products because this has a big impact on your score.


Diversify your credit products - if you can.


There are two different types of credit: revolving credit and instalment. Revolving credit are credit cards and lines of credit - where once you pay back an amount, that amount is available for you to use again in the future. Instalment is a loan, where you are advanced a sum, pay interest each month and you have a time frame to pay it back. Student loans, car loans, and mortgages are all considered loans of varying degrees.


Keep in mind, credit experience with multiple products is a small factor that can positively impact your score. It’s important to have both types of borrowing on your credit history because it demonstrates the ability to manage different credit facilities effectively. 


If you’re offered a credit limit increase, take it!


But be cautious - more credit does not mean you can spend more. It just means you have a higher credit utilization and the option to use more. Credit limit increases are good because it means you are being rewarded for your good credit behaviour!