Credit Scores 101: How Are They Calculated?

By: Brenden Somerville   |   15 Sep 2017
Large calculation

Whether you’re looking to finance or lease a vehicle, at some point how “good” your credit is or where your credit score sits will come up. Whether you have awesome credit, so-so credit, or bad credit, there’s a good chance you know your credit score. What you may not know is how your credit score is calculated. Read along while we take the mystery out of credit scores:


What is a Credit Score?

Basically, a credit score is a numerical expression of your overall credit and financial situation after an analysis of a few key factors. Lenders use credit scores to determine who qualifies for a loan, and what interest rate they can offer you. In Canada, generally speaking, a credit rating of 650-700 is considered an average number (on a scale of 250-900).


The Big 5

There are five major factors that are taken into consideration when your credit score is calculated. Payment History, Debt, Credit History, Recent Credit, and Credit Types. No two people are the same, and that includes their financial status and habits. does a great job at explaining these five factors:


1.  Payment History:  This, the most important, makes up 35 percent of your score. It is based on how well you pay off debt. Every time you miss a payment or pay late, your score will be lowered. Any major financial events in your life such as declaring bankruptcy, collection actions, past due payments and foreclosures will be kept in your payment history and drive down your score for five to seven years.


2. Total Debt: Debt accounts for 30 percent of your total credit score. This is the total of all credit card debt, loans, mortgages and other debts you may have and the length of time it takes you to pay it all off. If you pay all your credit card debts right away, this will decrease your total debt and improve your score. The ratio between the amount of credit available compared with the amount you have used will also affect your credit score.


3. Credit History: This accounts for about 15 percent of your credit score, and is determined by the length of time you have used credit services -- how long you have had credit cards, loans and mortgages. If you close an old credit card you have kept up to date for years, then start a new card, this shortens your history and can be detrimental to your credit score.


4. Recent Credit: This is the amount a lender agrees to let you borrow, and is worth 10 percent of your total score. After you are approved for a credit card or loan, the recent credit number will be adjusted.


5. Credit Types: These make up the last 10 percent of your credit score. Large loans such as mortgages have a greater impact on this number than a line of credit or a credit card.

Do you have questions about credit and credit ratings? Our finance team is here to answer any questions you may have and give you honest, professional advice and guidance—contact them anytime.

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