Credit 101: What is a credit score and why does it matter right now?

A credit score is essentially a number that represents your creditworthiness to lenders. Lenders, such as banks, mortgage & loan companies and credit card companies, use your credit score to evaluate the potential risk posed by lending you money and to determine whether or not you qualify for a loan, at what interest rate, and for what amount.

Your credit score is determined by these five weighted factors:

1. Payment history (35%): A history of on-time payments will improve your credit score. Keep in mind that simple accounts including your cellphone bill can negatively impact your score if payments are made late or not at all.
2. Amounts owing (30%): Owing money doesn’t necessarily mean you will have a low credit score, although it is a factor. Your debt-to-income ratio (the amount you owe vs. the amount you make) should be below 30%.
3. Length of credit history (15%): The longer you have a credit history, the higher your credit score is likely to be.
4. Credit mix (10%): Having a variety of credit accounts under your name (such as credit cards, retail accounts, loans and mortgages) is likely to increase you score.
5. New credit (10%): Opening several accounts in a short period of time can lower your score.

In Canada, credit scores range from 300 to 900. Below is the credit score scale. You want to make sure you’re at least in the green!

While you may think that a good credit score is only important if you’re shopping for a new home or car, there are many other aspects of life that are affected by a credit score. Building a good credit score now can improve your chances of moving into a nice apartment, landing your dream job, saving on insurance, reducing deposits for utilities and even getting a new cellphone plan.

Wayne Martin

Wayne Martin is a mortgage agent and team leader of the Mortgage Alliance Martin Team in Sudbury. With 25 years experience in the industry, he's passionate about breaking down the jargon to help everyone understand their finances and get into their dream home! When he’s not in the office, which is rare, you can find him at his camp on the French River.

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