A Look at What Makes Your Credit Score Go Down and How to Build Credit in Canada

Credit scores can fluctuate month to month. And if you’ve noticed that your credit score is lower than usual, you should figure out what makes your credit score go down. If your score is too low, it can prevent you from accessing important things in life, such as mortgages, rentals, and jobs.

A credit score can be damaged by a variety of factors. So it’s important to understand how your financial decisions impact your credit score and learn how to build credit in Canada.

What Is A Credit Score?

A credit score is a number assigned to you that is based on several financial factors and that represents your creditworthiness. In other words, a credit score tells lenders how financially responsible a person is, and what kind of risk they pose for defaulting on loan payments.

Your credit score is based on financial factors and will also determine many important financial factors in your life, including your access to loans, credit cards, rentals, mortgages, and even jobs.

How Are Credit Scores Calculated?

In Canada, two major credit bureaus—Equifax and TransUnion—calculate Canadians’ credit scores. These scores are calculated based on a person’s credit file or report, which includes your credit history, the length of your credit history, the age of your accounts, the amount of debt you have, and your payment history.

Here’s a breakdown of the weight each factor has in a credit score calculation:

Payment History – 35%

Your payment history makes up the largest part of your credit score calculation—35 percent. This payment history includes on-time payments (good for your credit) and late payments (bad for your credit).

Late payments are rated based on the length of time the payment is past due, with under 30 days being less harmful than payments that are 120 days past due.

Here are payment history factors that can hurt your credit score:

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• Missing a card or loan payment
• Collections and charge-offs
• Bankruptcy
• Foreclosure/repossession by a secured creditor
• Collection lawsuit
• CRA tax lien
• Debt settlement
• Refinancing a home, student, or car loan
• Being an authorized user on someone’s bad account
• Not having a credit card
• Credit report errors

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Credit Utilization – 30%

The amount you owe for your credit accounts will affect your credit score. Utilization makes up 30 percent of your credit score calculation. This is how much you owe in total, and for each credit account.

For example, if you are near your credit limit, your credit score will drop. Ideally, you should only owe 30 percent of your credit limit to maintain good credit. And owing anything higher than 80 percent of your limit will negatively impact your credit.

Here are credit utilization factors that can hurt your credit:

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• Missing a card or loan payment
• Maxing out a credit card or line of credit
• Debt consolidation
• Refinancing a home, student, or car loan
• Cancelling a credit card
• Being an authorized user on someone’s bad account
• Credit report errors

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Length of History – 15%

The age of your credit accounts makes up 15 percent of a credit score. The longer you have an account with a good payment history (on-time payments), the better it will be for your credit.

These factors can hurt the length history portion of your credit rating:

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• Applying for too many credit cards
• Refinancing a home, student, or car loan
• Cancelling a credit card
• Not having a credit card
• Credit report errors

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Type of Credit – 10%

The type of credit products you have will affect about 10 percent of your credit score. Credit cards are higher risk because you can pay them off and then max them out again. Whereas mortgages are reduced with each monthly payment.

Credit Inquiries – 10%

Your credit history includes each time your credit is checked—which is known as inquiries. Inquiries make up about 10 percent of your credit score calculation.

Here are types of credit inquiries that can hurt your credit score:

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• Hard inquiries (an inquiry from a prospective lender you applied to)
• Applying for too many credit cards
• Debt consolidation
• Refinancing a home, student, or car loan
• Errors in your credit report

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What Hurts My Credit Score?

Late and Missed Payments

You bill payment history directly affects your credit score. So if you miss bill payments or are late making payments, your credit will suffer. These bill payments include credit cards, lines of credit, installment loans, car leases, and cellphone bills.

Too Many Credit Accounts

Having too many credit accounts open can hurt your credit score. Credit accounts include credit cards, retail accounts, mortgage loans, and installment loans.

Too Few Credit Accounts

Having few or no credit accounts can also harm your credit score because you are unable to prove to lenders how you manage your credit.

High Credit Card Balances

The amount owed on your credit card(s) will also affect your credit. The amount includes the total owed to all creditors and lenders. And the higher your credit card balance, the more damaging it can be to your credit—i.e. if you are close to or have maxed out your limit.

High Balances on Loans

Opening a large installment loan, such as a car loan, can negatively impact your credit score. The high balance combined with a short history makes the loan appear riskier because there’s uncertainty over whether you will pay down the loan.

Too Many Credit Applications

You can hurt your credit score if you apply for credit with different lenders within a short timeframe. And if you have a short credit history, too many credit applications can especially hurt your score.

Credit Scores: The Good, The Bad, And the Ugly

What is a good credit score? In Canada, credit scores usually range from 300 to 900. And the higher your credit score, the better. A high credit score shows that you are low-risk and less likely to default on repaying a loan.

Here’s a look at the different credit scores, ranging from excellent to poor:

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• 800 to 900—excellent credit—will likely qualify for the lowest interest rates available;
• 720 to 799—very good credit—will have a variety of credit choices;
• 650 to 719—good credit—but you may not qualify for the lowest interest rates available;
• 600 to 649—fair credit—you will need to prove your financial responsibility with a history of debt repayment;
• 300 to 599—bad credit—you will need to improve your credit with a debt management plan, such as making payments in full and on time, paying off your debts, and closing credit accounts if you have too many open.

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If you are way over your head in debt and have a negative credit score, consider debt counselling. Debt counselling can help you manage your debt. Consolidating your debt can also drastically improve your debt situation.

A consumer proposal or bankruptcy claim can also help you pay off your debts faster. And while these can hurt your credit score in the short term, it’s only temporary. And you can rebuild your credit without the burden of being buried in debt that can be so hard to escape otherwise.

Filing a consumer proposal or filing for bankruptcy will put an end to the otherwise perpetual reporting of unpaid loans on your credit report (a permanent low rating or score). They give you a fresh credit report and credit score start. Bankruptcy is struck from a credit report six years after discharge for first-time bankruptcy and consumer proposals are struck 3 years past the final payment under the consumer proposal.

Solutions Tailored for You

If you are overwhelmed with debt, and your credit rating is low, or you expect it to plummet due to having an account sent to collections, or the garnishment of your pay, it is highly possible that the best thing you can do is to file a consumer proposal. A consumer proposal is a debt and money management plan overseen by a federally licensed and regulated professional. Consumer proposals stop collections, garnishments, collect lawsuits and accruing interest. A single and affordable monthly payment is required, and you will be debt-free in 5 years or less. Principal reductions to 20% to 40% of the amounts owed are very common. The filing of a consumer proposal will give you a fresh start on building a good credit score.

Baker Tilly Ottawa Ltd. is a Licensed Insolvency Trustee servicing Ottawa, Gatineau, and Eastern Ontario since 2002. Its licensed professionals have over 100 years of combined experience in assisting individuals in financial difficulty. They have overseen thousands of successful consumer proposals.

Their passion – their mission – is your health and well-being! Start your journey today with a free initial consultation!