Published July 10, 2023 • 3 Min Read
Maintaining a strong credit score is one of the most important things you can do to set yourself up for financial success. Mortgage lenders, credit card providers, landlords, cell phone companies and auto dealers use credit scores to determine your creditworthiness.
While there are other credit score providers, most Canadian lenders use TransUnion or Equifax. Keeping a strong credit score can help speed up approvals and reduce the interest rate you will pay.
What is a credit score?
Your credit score is a good indicator of your financial health and reflects your ability to borrow money and repay it responsibly. It’s one of the key tools banks, credit card companies or other institutions use to determine whether you qualify for credit.
While the exact formula credit score providers use to calculate your score is proprietary, the percentages below are a good guide.
Here are five key ways to help you maintain a good credit score:
1. Payment history
One of the biggest factors in determining a credit score is your payment history. Making payments regularly and on time helps demonstrate your ability to manage your debt responsibly. You gain points on your score for making regular, on-time payments. If you miss payments, you may lose points. Payment history can account for approximately 35 per cent of your credit score.
2. Credit utilization ratio
Your credit utilization ratio compares the total amount of debt you owe to your total available credit. If you max out your credit cards, for example, it will show a high credit utilization ratio, which may negatively affect your credit score. For a higher credit score, keep your credit use under 30-to-35 per cent for all your available credit sources. If your monthly credit card limit is $10,000, try keeping your monthly balance around $3,000. Credit utilization can make up 30 per cent of your total score.
3. Types of credit
Your credit mix — having different kinds of credit — can help positively impact your credit score. If you only have one kind of credit, such as credit card debt, your score may be lower than someone with an auto loan as well. Diversity may be key to keeping a healthy score. Types of credit may account for roughly 10 per cent of your score.
4. Credit inquiries
When you apply for new credit, the lender typically performs a “hard inquiry” on your credit report. A “soft inquiry” doesn’t impact your score and includes inquiries like when you check your score yourself. Multiple hard inquiries within a short period of time may suggest an increased risk to lenders and lower your score. This may account for 10 per cent of your score.
5. Length of your credit history
The longer you’ve had credit, the more information there is for a lender to see. Over time, good payment history and low credit utilization can add points to your credit score. Lenders like to see you’ve repaid your debts over time, along with repaying different kinds of debts. Depending on the formula a credit bureau uses, credit history may account for 15 per cent of your score.
Knowing the factors that impact your credit score is an important step, but using them to maintain a strong rating over time can help you reach your financial goals — and give you more peace of mind.
Curious about what your current credit score is? RBC Clients can check their credit scores for free through RBC Online Banking.
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.
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