The credit rating.  The dreaded credit rating.  Everyone has one, and it plays such an important role in our lives.  If you’ve ever applied for a new cell phone, credit card, limit increase, line of credit, bank loan, car financing, or a mortgage, then you most likely had to meet the lender’s credit score requirements in order to get approved. 

Each month, your lenders report to the credit bureaus whether you made your payment late or on time.  All that payment data is used to determine your credit score.  Your credit report keeps payment history for 7 years.

Some people believe that paying your bills on time is all you need to do to have a good score.  While payment history is a big factor in determining your credit score, it is not the only factor.  There are several components to your score and some carry more weight than others. 

Here is a list by order of importance of these components, along with some tips:

1.  Payment history – The most important factor
If you pay your bills on time; your score stays flat or maybe goes up.  If you don’t pay your bill on time, your score will go down. 

For credit cards, you need to make at least the minimum payment for it to count as an on-time payment.  If you routinely make late bill payments, I would suggest looking into whether you can setup automatic payments with the lender.  Usually, they offer a program where either the minimum payment of the full bill payment is automatically taken out of your bank account each month. 

Although the payment of your utility bills (i.e. electricity, phone, cable), is not recorded in your credit report, some cell phone companies may report late payments to the credit-reporting agencies, which will negatively affect your score.

2.  Amount borrowed compared to available credit
Do you spend up to your limit each month on your credit card?  This will have a negative impact on your credit score. 

Avoid borrowing more than 50% of your available balance from any single lender, and ideally you want to borrow less than 33% of your available balances. 

3.  Length of Credit History
The longer you hold an account, the better.  Having accounts opened for 7 years will increase your score.  Avoid constantly closing and opening new credit cards.

4.  Inquiries and New Debt
Having your credit bureau report constantly pulled up for a new credit card application will have a negative bearing on your score.

If you know you’re applying for a mortgage soon, avoid applying for new credit cards in the weeks or months preceding your mortgage application.

5.  Type of Debt
Holding certain types of debt is better than others.  Car loans, and mortgages are called “installment debt” and are looked at more favorably than “revolving debt” such as credit cards and lines of credit. 

The first two items on the list each account for about 30-35% of your credit score and the next three account for about 10-15% each.  Your credit score is updated each month as new payment data becomes available. 

There are two major credit bureaus in Canada: Transunion & Equifax.  You have the right to obtain your credit report from both these companies.  You can usually obtain your credit bureau reports for free, and this will contain information about the various lenders you deal with and your payment history, but not your actual score.  If you want to obtain your credit bureau score, you will have to pay a fee (around $10-$20).