If you are in the market for a home, you are probably very familiar with your credit score. A healthy credit score is critical. It could mean the difference between getting approved for a mortgage loan or not. Your credit score is determined by a culmination of factors and is therefore important to have a knowledge of the factors so that you can effectively strategize ways to maintain a good score.

5 factors that impact your credit score:

PAYMENT HISTORY

35% is for payment history (i.e. late payments, bankruptcies, collections and judgments). Your payment history, or how consistently you pay your bills on time, is usually the biggest factor in calculating your credit score. Because it’s such an important component, late or missed payments can have a significant overall impact on your score. Lenders also want to see how likely you are to pay back the credit they are about to give you, and they figure it out by looking at how/whether or not you paid back your other loans and consumer credit.

CREDIT UTILIZATION

30% is for credit utilization. This is a measure of the amount of credit available to you vs the amount of credit you’ve used. A widely-regarded rule of thumb is to keep your total credit utilization lower than 30% of the credit available to you.

CREDIT HISTORY

15% is for the length of credit history – how long your accounts have been open and established. In general, creditors and lenders like to see that you’ve been able to properly handle credit accounts over a period of time. Credit accounts with a longer history showing responsible credit behaviour will reflect positively on credit scores.

CREDIT MIX

10% is for diversity, a mix of different types of credit you have, such as credit cards, instalment loans, mortgages, and store accounts. Diversity of credit shows lenders the types of credit products you have available.

NEW CREDIT 

10% is for new credit enquiries or credit checks. This looks at how many new accounts you have as well as how many new accounts you’ve applied for recently. Having too many new accounts may indicate to lenders and creditors that you’re taking on a lot of new debt and may be a high-risk borrower.

Tips to improve your credit score:

AVOID LATE OR MISSED PAYMENTS 

Payment history has the biggest impact on your credit rating. It factors for 35% of your overall score. The single biggest thing you can do to improve your credit score is the most obvious and straightforward one: pay your bills on time and avoid late or missed payments. Consider enrolling in automatic payments through your credit card and loan providers to have payments automatically debited from your bank account.

KEEP CREDIT CARD BALANCES LOW

Thirty percent of your credit score is based on the amount you owe, so you want your balances to be as low as possible.⁣ Having balances consistently above 30%-50% could see your credit score start to drop.

GET A HIGHER CREDIT LIMIT ON YOUR CREDIT CARDS

One way to keep your credit utilization as low as possible would be to accept or request for a credit limit increase by your credit issuer. Even if you know you don’t intend to use the maximum it will give you a nice buffer to keep your credit utilization low. For example, keeping your spending the same at $1,000 and by increasing your current credit limit from $2,000 to $3,500 reduces your credit utilization from 50% to 29%.

CHECK YOUR CREDIT REPORT FOR ERRORS

Errors on your credit report happen more frequently than people think. Carefully review your credit reports from both Equifax and Transunion reporting agencies for any incorrect information that might be lowering your score. Dispute inaccurate or missing information by contacting the credit reporting agency and your lender.

KEEP YOUR OLDEST ACCOUNT ACTIVE 

The third biggest influence on your credit score is length of credit history. This is basically the average age of your credit accounts. When trying to increase your score, avoid closing older credit accounts. Keeping the accounts open and in use will help maintain the length of your credit history and better your score.

APPLY FOR NEW CREDIT SPARINGLY  

Only apply for new credit when you actually need it and not simply to boost your available credit. Opening several new credit accounts in a short time frame can lower your score.

It is always a good idea to regularly check up on your credit score – ideally at least once a year. Remember that it takes time to improve your score, so patience and persistence are key. Even if you aren’t looking to borrow money anytime soon, there are a lot of reasons to keep an eye on it. Feel free to reach out if you have any questions in regards to your credit.