4 Things That Can Affect Your Credit Score

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August 5, 2020

When it comes to assessing your financial health, your credit score might not be the first thing you think about. However, a good credit score is incredibly important, as it can help you be approved for loans and credit, lower your rates on credit cards and insurance, avoid security deposits, and give you better negotiating power in a variety of circumstances.

Understanding the basic principles of credit and what activity may be affecting your credit score is not as straightforward as you’d think. Although access to credit report software makes it easier to monitor your score, it doesn’t give a direct explanation of the little things that may be impacting it, such as your payment history, loans, balances, and even how many times you’ve applied for a new credit card. Here are few unexpected things that might be lowering your credit score.

Credit inquires

One misconception that many people have about their credit report is that requesting a copy of your credit history can lower your score. Part of the reason for this confusion is because there are two types of credit inquires. When an individual requests a copy of their own report or accesses it through an online platform, that’s considered a “soft hit" and will not negatively impact your credit. Regularly checking your credit score is encouraged and is a good way to make sure your information is correct and notify you of any identity theft. The second type of credit inquiry is called a “hard hit,” which occurs when you apply for a new credit card or loan. This form of inquiry does affect your credit score because the request is being made by a third-party.

One thing that should be noted about “hard hits" is that there are some loopholes that can limit their impact. If the purpose of your “hard” credit inquiry is for a large purchase like a mortgage or car loan, you’re typically given a grace period. This will allow you to shop around for competitive rates on loans without having multiple reviews by lenders affect your credit history.

Payment history

Payment history plays a large part in whether you have a ‘good’ or ‘bad’ credit score, as it accounts for at least 35% of your score. Your payment history is essentially a record of your ability to pay your bills on time. If you are someone who consistently pays bills on time and never has a missed or late-payment, lenders are more likely to approve you for financing or loans. If your repayment history is filled with missed payments or even something as minor as late phone bills, your credit score can be negatively impacted. Although a single missed or late payment won’t have a huge impact on your score, once your debt is sent to collections, your score will start to be impacted. Multiple late or missed payments can quickly shift your credit standing from “good” to “bad” and should be avoided.

Credit usage

When it comes to improving your credit score, the most important thing is having more than one type of credit. Those who don’t often end up having lower credit scores. To improve your credit score, you should have a good mix of credit, like:

  • credit cards
  • personal loans or line of credit
  • a mortgage
  • car loans

Diversifying the types of credit you use and managing it well proves to creditors that you are reliable, which can increase your score. Your credit usage makes up a total of 10% of your overall credit score calculation.

Debt

The average Canadian will always have some form of debt, but it’s how you manage that debt that determines the weight it has on your credit score. If you have debt but still manage to make payments monthly and on time, your credit score will likely remain unaffected and possibly even improve over time. If you have debt that you’ve mismanaged, been sent to collections for, or simply abandoned all payments, you’ll see significant drops in your credit since your payment history accounts for a large portion of your overall score. An easy way to avoid this is through debt consolidation but if your score is already low, you should speak to a financial advisor to see if you qualify for a personal loan or line of credit before any credit inquiry is made on your account.

Understanding your credit score is complex but it’s something you should pay attention to, especially if you plan to apply for loans or financing. Having a clear understanding of your credit history and overall score can keep your finances in good standing and positively impact your financial future.