Where does my score come from?

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Most people begin their credit history with their very first credit card, which they can get on their own at the age of 18 or 19, depending on the age of majority in their province. Most immigrants to Canada will go the same route.

As soon as you swipe your card for the first time, your credit card provider, utility companies and any other creditors will begin reporting your behaviour to the big credit bureaus. Within about six months, these bureaus will have enough data on you to fill out a credit report and calculate your first credit scores.

So what is your score at that point? The good news is that you won’t start at 300, the bottom of the scale. That’s reserved for people who have completely wrecked their reputation with missed payments and bankruptcies.

The reality is that you start off with no score at all.

When the formula is first applied, your credit score will probably land somewhere in the fair range, right around the middle. You haven’t had time to do much harm but you also haven’t proven yourself, either.

You won’t get access to sizable loans and good interest rates until you reach the upper echelons of the scale. Here’s how to boost your credit score in record time.

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What goes into my score?

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While Canada’s two big credit bureaus — Equifax and TransUnion — have access to slightly different information and use slightly different calculations, they focus on the same five factors:

Payment history (35%)

This is the single most important factor in determining your creditworthiness. Every missed payment, from credit cards to phone bills, can stain your credit report for up to six years. Be sure to make payments on time and in full if you want to raise your credit score.

Credit utilization (30%)

If you’re borrowing close to your limit, you’re hurting your score more than you may know.

Credit utilization is the ratio of credit used versus the total credit available to you. So if you’ve racked up $700 of debt on a card with a $1,000 limit, you would have a 70% utilization rate on that card.

For a good score, you’ll want to keep your total utilization across all of your balances below 30%.

Credit length (15%)

Lenders want to see a long history of responsible borrowing. If you’re just starting out, use your first card with this future goal in mind.

And make sure not to cancel any cards or accounts without good reason. Having an old card on file, even if you don’t use it anymore, shows lenders that you’re an experienced borrower.

Credit mix (10%)

Lenders will be pleased to see that you’re a whiz with a credit card — but what about car loans, mortgages, student loans and lines of credit? A diverse borrowing history can show lenders that you’re responsible with all kinds of loans.

Hard inquiries (10%)

When you apply for a new loan or credit card, lenders will peruse your financial history to see if you’re a safe bet or not.

Too many of these checks, called hard inquiries, in a short period of time would suggest that you’re churning credit cards, using new loans to cover old debts or you’re broke and desperate for cash.

What if I have bad credit or no credit?

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If you’re unable to get a normal credit card, one way to build your history and improve your score is to open a secured credit card, instead.

Secured credit cards require you to pay a deposit, which is held as collateral until the account is closed. If you don’t pay your bills, the lender gets to keep your deposit. Secured credit cards are easy to get but may not improve your score as effectively as a regular, unsecured card.

Another option is a credit-builder loan, an unusual product solely designed to show off your ability to make regular payments. The lender actually holds on to the amount you “borrow,” only releasing it to you after you’ve paid off the balance over time. These loans still aren’t free, though, so make sure you’re prepared for the interest rate.

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How do I monitor my score?

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With so many factors affecting your score from month to month, it can be hard to tell how much of an impact your efforts are making. Thankfully, a number of free online services allow you to monitor your progress.

One popular option in Canada is to sign up for Borrowell. You’ll get access to your Equifax credit score for free as well as a suite of services to improve your financial health.

Those include custom tips to improve your score, notifications when you miss a payment and personalized offers for loans, mortgages and credit cards that suit your current credit. You can also check your credit report for any errors that might be damaging your reputation.

By keeping a close eye on your credit, you’ll be able to get your score in the green and unlock money-saving rates that will pay off for years to come.

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Daniel McIntosh Former Staff Writer

A former staff writer for Money.ca, Daniel is an experienced Toronto-based freelance writer and content strategist for web and print. He is a pandemic graduate with a bachelor's degree in journalism from Toronto Metropolitan University (formerly Ryerson University). When he’s not writing, Daniel can be found hiking southern Ontario trails, haunting his local thrift store or snapping pictures at music festivals.

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