Credit Fundamentals and Responsible Credit Management
Credit plays a significant role in modern financial life, affecting everything from rental applications to mortgage approvals and even employment opportunities in some cases. Understanding how credit works, what factors influence credit scores, and how to manage credit responsibly are essential components of financial literacy.
In Canada, credit scores typically range from 300 to 900, with scores above 650 generally considered good and scores above 750 considered excellent. These scores are calculated by credit bureaus—primarily Equifax and TransUnion in Canada—based on information in your credit report. Your credit report contains a detailed history of your borrowing and repayment behavior, including credit cards, loans, mortgages, and other credit accounts.
Several factors influence your credit score, each carrying different weight in the calculation. Payment history is typically the most significant factor, accounting for approximately 35% of your score. This includes whether you pay bills on time, any missed or late payments, and the severity and frequency of payment issues. Even one missed payment can negatively impact your score, and the effect can last for several years.
Credit utilization—the ratio of your current credit card balances to your credit limits—is another major factor, usually representing about 30% of your score. Using a high percentage of your available credit can signal financial stress to lenders. Financial experts often suggest keeping credit utilization below 30% of available limits, and lower is generally better.
The length of your credit history affects your score, typically accounting for about 15% of the calculation. This includes the age of your oldest account, the age of your newest account, and the average age of all your accounts. This is why closing old credit accounts can sometimes have a negative effect on your score—it may reduce the average age of your accounts.
Credit mix refers to the variety of credit types in your profile, such as credit cards, installment loans, and mortgages. Having a diverse mix can positively influence your score, though this is usually a smaller factor. Recent credit inquiries—when you apply for new credit—can temporarily lower your score, particularly if you have many inquiries in a short period. However, rate shopping for mortgages or auto loans within a concentrated timeframe is typically treated as a single inquiry.
Building good credit requires consistent, responsible behavior over time. Key practices include paying all bills on time, every time, as payment history is the most influential factor. Setting up automatic payments or reminders can help ensure you never miss due dates. Keeping credit card balances low relative to your limits helps maintain healthy utilization ratios. Maintaining older credit accounts, even if you use them infrequently, supports a longer credit history.
It's important to regularly review your credit reports from both major Canadian credit bureaus to check for errors, identify potential fraud, and understand how lenders see your credit profile. Canadians are entitled to free credit reports, though you may need to pay for credit scores unless they're provided through your financial institution or credit card company.
Common credit mistakes include missing or making late payments, using too much of your available credit, closing old accounts unnecessarily, applying for multiple credit accounts in a short period, and ignoring your credit reports. Understanding these pitfalls can help you avoid actions that might harm your credit standing.
Remember that building or rebuilding credit takes time. There are no quick fixes or shortcuts to a good credit score. Responsible credit behavior practiced consistently over months and years is the most reliable path to strong credit health. This educational understanding of credit principles can help inform your personal credit management decisions.