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How to improve credit score? How is credit score calculated?

Credit score, along with income, employment history, and downpayment, is one of the important factors when qualifying for a mortgage. Before approving a mortgage, the lender has to see if you have been a good borrower. To do this, the lender will access your credit score and will review your file. Using past statistics, the lenders know that people with lower scores are more likely to default on their loans. Thus, most banks will choose not to deal with customers who have a credit score below a certain threshold.

Different lenders will accept different levels of Credit Scores. The bigger banks will only accept Credit Scores of 650 and above. Smaller lending institutions will often accept lower levels of Credit Scores. However, they will also charge higher interest rates and demand higher downpayment for those with lower Credit Scores to account for a potential borrower default risk. Below is the representation of how financial institutions usually categorize credit scores:

Credit Score Ranges. How to improve credit score? How is credit score calculated?
Credit Score Ranges

The credit score is a numerical representation of your current and past credit behavior. The credit score can range between 300 (lowest for the worst credit) and 900 (best credit score).

In the USA, there are 3 credit score companies (TransUnion, Equifax, and Experian) that divide the market for providing credit scores. In Canada, there are 2 players that make up the majority of the market: Equifax and Transunion.

Equifax’s credit score is called the Beacon Score while TransUnion’s is called Empirica Score. For the lender, the credit score plays a significant factor in the decision to lend, and in determining the terms and conditions of that loan.

Credit bureaus continuously improve the calculations behind credit scores. There are several major items that affect an individual’s credit score, as is illustrated by the following figure.

How to improve credit score? How is credit score calculated?

How is credit score calculated?

Since the credit-scoring models used by the credit bureaus are proprietary and are kept in secret, the below table may serve as a close-enough representation of the logic. Close examination of the table will help guide your steps for improving your credit score, which we will discuss later.

This is only for illustration purposes and does not insinuate nor purport to be how Equifax, Transunion, or any other credit bureau determines a credit score.

How to improve credit score?

Below are the key factors that impact your credit score:

  • Payment History. Missing or late payments will harm a credit score. It is important to ensure that all payments are made on or before their due dates, and in the correct amount.

  • Credit utilization: Amounts Owed vs. Maximum Available Credit. A rule of thumb is to keep balances below 30% of the available credit limit. Balances over this amount may lower a credit score. The red flag for a lender is when a person has several accounts and all have high balances in relation to the maximum credit amount. This may indicate the person is heavily relying on credit to meet their daily living needs.

  • Length of Credit History. Overall, the longer the credit score file has been active, the better. This is why newcomers to the country should try to get their first credit card as soon as possible. Also, credit score looks at each of your credit lines (be it a credit card, line of credit, credit a department store, etc.) The longer the credit line is active, the higher the credit score. Thus, if you think about closing some credit lines, consider closing the most recently opened one.

  • New Credit and Inquiries. Each time you apply for credit, the lender will access your credit score report, and multiple inquiries can lower your credit score. The credit bureaus have built a system to spot a credit seeker which is shown by frequent inquiries on your file. However, the system is smart enough to see if you have been seeking a mortgage or a car loan. For example, if you have applied to a number of lenders to get the best mortgage, and have finally picked one, the credit score system will ignore all inquiries during the 30-day period (buffer zone) prior to your finding your preferred lender. However, multiple applications for other types of credit, such as personal loans and credit cards, will lower an individual’s credit score.

  • Credit Mix: Types of Credit. The best mix of credit is a combination of a store credit card and a major credit card such as a Visa or MasterCard.

  • Number of Trades on File. Too many credit cards and loans may also lower an individual’s credit score. By having only a few trade lines, an individual’s credit score may be improved.

  • Credit Inactivity. Using credit responsibly is one of the fastest ways to increase a credit score. Unfortunately, those who only use cash to make purchases can have a lower credit score than those who regularly use credit.

As you can see from this illustration-purpose table, there are factors that you cannot impact, as the only thing that impacts them is time. Others require quite some time to fix, such as past missed payments on credit cards that stay on file for quite some time. However, there are a few factors that can be improved quite easily. For example, you can see if you can do any of the following immediately:

  1. Reduce the number of credit cards. Do you potentially have cards you barely use that you can cancel?

  2. If you have a credit card from a bank, do you also have a credit card from a major department store? I know having an extra card in your wallet from a retailer you barely use may be a trouble for some, but it can help improve your credit score.

  3. Do you have a savings account in addition to a checking account?

  4. Can you reduce debt utilization for your cards? It could be possible that you are using your credits cards to a maximum because of the points or cashback on those. However, reducing credit utilization may help increase your credit score.

  5. It makes sense to buy a one-month subscription to one of the credit bureaus to see your credit report. There, you can double-check any past problems you might not be aware of (such as missed payments on credit cards). This helps be more mindful in the future. Also, you may spot any omitted information or any information that is not correct. If you spot any inconsistencies, it is worth contacting the credit bureau and correcting them by providing documents proving your point. Such changes may relate to occupation, years in the job, etc., and help improve your credit score. Also, when accessing your file, you can see all the different factors the credit bureaus take into consideration for calculating your credit score (though they will not share information on what particular impact each of the factors has.) Lastly, god forbid, you may uncover any fraud uses of your information for credit lines that you are not even aware of.

A credit report contains information that is kept on an individual’s file for a certain period of time. This can differ in different states in the USA and provinces in Canada, but the following chart illustrates how long both Equifax and Transunion usually keep specific information.

Years items kept on file



Credit transactions, from the date of last activity



Judgments, from the reporting date



Collections, from the first date of delinquency



Secured Loans, from the date opened



Bankruptcy, from the date of discharge



Consumer Proposal, from the date satisfied



Credit Counseling, from the date paid



In summary, a credit score is likely one of the key numbers in your life, especially when it comes to dealing with financial institutions and obtaining credit. It is important to know how a credit score is calculated, make sure to check your credit score file at least once a year, and see if it has deteriorated or improved. If your credit score is deteriorating, correcting the course is important to make sure you can obtain credit and get the best possible interest rates.

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