How Your Credit Score is Calculated

All the Factors That Contribute to Your Credit Rating

The topic of credit is often a confusing one, as your credit rating is constantly fluctuating, meanwhile this number can have a significant impact on a lot of major decisions, such as buying or renting a home, or obtaining a loan.

You may find yourself asking, what causes my credit score to fluctuate, and what can I do to improve my rating?

To help you better understand your credit score, we’ll explain what exactly this rating is and how it is calculated, and also provide some tips for improving your credit score.

What is a Credit Rating and Credit Report?

A credit score, also known as a credit rating, is a three-digit number between 300 and 900 that represents your risk of not making credit/loan payments.

Those with strong credit ratings are usually deemed ‘low risk’ to lenders, while individuals with lower ratings can be seen as a higher risk of defaulting on loans and credit payments.

Credit scores are calculated using information in your credit report – a summary of your credit history –which can be accessed through one of Canada’s two national credit bureaus, Equifax or TransUnion.

What is Considered a Good Credit Rating?

Here’s a breakdown of the ranges of credit ratings and how they are typically ranked:

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  • 800 – 900: Excellent
  • 720 – 799: Very Good
  • 650 – 719: Good
  • 600 – 649: Fair
  • 300 – 599: Poor


Keep in mind that this is just a guideline, and many lenders are still willing to lend to borrowers with credit score of 620 and up.

How a Credit Score is Calculated

You might be wondering, how do credit bureaus determine what credit rating to give you, and what types of things have a positive or negative impact on your credit score?

There are several factors at play that have an impact on your credit score.

Payment History

Payment history has the most significant impact on your credit rating. In fact, 35% of your credit score is determined by your payment history. So, if you have a long history of making payments on time, this will have a positive effect on your credit score. But if you have missed or made several late payments, especially in the past year, this will cause your credit score to decrease significantly.


Credit utilization refers to the ratio of the balance you hold on your credit products to your credit limit.

For example, if you have a credit card with a $3,000 limit, and have only used $500 of that credit, your credit utilization ratio will be just 16.6%.

But if you have used $2,875 of that $3,000 credit limit, your credit utilization ratio will be significantly higher, at 95%. For this reason, it’s incredibly important to work towards paying down your debt, and not carry high balances on your credit cards.

After payment history, utilization is the second most important factor that contributes to your credit rating, and accounts for 30% of your credit score.

Length of Credit History

How long all your credit accounts have been open also influences your credit rating, as 15% of your overall score is determined by this.

The reason for this is that creditors like to see that you have been responsible with your credit accounts over a long period of time.

Credit Variety

While you may think that having very little debt (i.e. one credit card with a low credit limit) would give you a higher credit score. This isn’t actually the case.

Creditors like to see that you’ve been able to maintain various types of credit and be responsible when it comes to repayment.

This can include:

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  • Credit cards
  • Mortgages
  • Car loans
  • Lines of credit
  • Personal loans



Anytime someone requests access your credit file, this request is logged as an inquiry. Inquiries can affect your overall credit rating by 10%, as this is typically a sign that you are attempting to access new credit, which can be an indication of financial distress.

Bankruptcy or Consumer Proposal

A consumer proposal will appear on your credit report as an R7 rating for the duration of the consumer proposal and will remain there for 3 years after it has been completed.

For bankruptcy, the effect is more significant, as an R9 rating will appear on your credit report for 6 years after the date of your discharge with Equifax and 7 years after the date of discharge with TransUnion. If you have been bankrupt previously, the bankruptcies will appear on your credit report for 14 years after the date of discharge.

Having these types of public records in your credit report can affect your credit rating by 10%.

Tips for Improving Your Credit Score

So, how do you go about making changes that will help boost your credit score? There are several actions you can take. Here are a few tips for improving your credit:

Pay Down Debt

If you have a large amount of debt, working towards paying it off will help to improve your credit rating, as it will lower your debt utilization ratio.

Ask for a Credit Limit Increase

While this may sound counter productive, obtaining a credit limit increase can be beneficial when it comes to your credit score. The reason for this is that it helps to improve your credit utilization ratio. However, it’s important to not use any of this newly available credit. Instead, focus on paying down your existing debt.

Get a Secured Credit Card

If you have a history of bankruptcy or consumer proposal and want to work towards improving your bruised credit, but are having difficulty obtaining credit, consider a secured credit card.

A secured card is a credit card requiring a deposit that helps to build positive credit history. This deposit is usually the same amount as your credit limit and is held as collateral in case you miss any payments.

Depending on your agreement with the creditor, your deposit may be returned to you after a certain amount of time and good repayment history, and the secured card will become an unsecured credit card.

Don’t Miss Any Payments

Maintaining a record of on-time payments will help to show that you are being responsible with your credit and will help to cancel out your previous payment delinquencies over time.

Don’t Close Old Accounts

When working towards paying down debt, it’s common to close out old accounts to avoid creeping back into bad habits. However, this can have an impact on your credit rating as having these older accounts helps to establish your credit history. Instead, keep these accounts open, but don’t use them.

If your debt has started to become unmanageable and is having a negative impact on your credit rating, speak with a Licensed Insolvency Trustee about debt relief solutions such as bankruptcy or a consumer proposal.

While bankruptcy and consumer proposal can have a negative impact on your credit rating, they also provide you with relief from your debts so you can start fresh and work towards rebuilding your credit without excess debts weighing you down.

Baker Tilly Ottawa Ltd. is a Licensed Insolvency Trustee and Consumer Proposal Administrator. Its professionals have assisted thousands of individuals successfully resolve their debt crises and overcome financial turmoil since 2002. Its passion – its mission – is your health and well-being!