Personal
Home Bank accounts
Credit cards
Borrowing
Mortgage
Savings and investments
Insurance
Advice
Business
Home Banking Solutions
Credit Cards
Financing
Investing
International
Going Further
Tips and Tools
Wealth Management
Home
CLOSE

What is a Credit Score ?

23 November 2020 by National Bank
credit score

A credit score is an assessment of your credit history and your ability to manage the credit assigned to you. It’s the result of a mathematical formula used to quantify your risk level. Your score is obtained after a detailed analysis of your credit report, your credit history (type and duration of loans, payment due date compliance, etc.), and your personal information. 

Assessing an individual’s credit score

A credit score is typically attributed by a credit reporting agency, otherwise known as a credit bureau. These companies collect data to assess the likelihood that an individual will be able to meet their financial commitments.

Your credit score changes over time depending on your financial behaviour. For example, your credit score could drop if payments are made late, or if credit cards and loans are nearing their limits. Conversely, making all debt payments on time can help improve your credit score. 

Credit scores typically range from 300 to 900. A good credit score is 670 or higher. A score of 800 or more is excellent, indicating that the risk of not honouring payments is low. Your score is one of the indicators used by lenders to determine whether a request for credit (such as a credit card or line of credit) will be accepted along with the accompanying conditions, if required.

Different factors can influence your credit score, for example, in order of importance:

  • Your payment habits (35%)
    The more often you make payments on time and the more often you make payments in general, the better your score will be. Late payments and defaults will lower your score. 
  • Your use of available credit (30%)
    Approaching your credit limit can negatively impact your score.
  • The date your account was opened (15%)
    The age of your account can have a positive impact on your rating. An account that has been open for a long time allows lenders to learn about your repayment habits. Paying accounts on time over a long period of time is a sign of good credit management.
  •  Amount and types of debt (10%)
    Having a variety of accounts can positively impact your score, like if you hold these three kinds of accounts: a mortgage, a credit card, and a line of credit. However, having many accounts of the same type can be to your disadvantage: many accounts of the same type give you access to more credit, so you’re at greater risk of running into problems with debt.
  • The amount of new credit applications you make (10%)
    The more applications you make, the more your rating suffers.

What is a credit score for?

Lenders use credit ratings to assess a customer’s risk level. Telecommunication companies, insurers, building owners/landlords and government agencies also use credit scores to assess risk level. 

Some debunked myths about credit score

1. My credit score will be penalized  if I check my credit report

Not at all! On the contrary, to get your financial situation under control and to spot fraud, you should check your credit report regularly.

2. It is impossible to oppose the assessment sent by creditors to credit agencies

You have the right to report any inaccuracies that appear in your report to credit agencies.

3. Changing my spending habits won’t change my personal credit rating

Your credit score comprises your credit card balances and other loans, so reducing your balance is helpful. Cutting back on spending and getting into less debt can positively affect your credit score.

4. My business debts won’t affect my personal credit score

Even if your accounts are separate, lenders will often ask you for a personal guarantee for money loaned to your business. If your business is in trouble, your personal report might be affected.

5. Responsible use of my debit card will improve my credit score

A debit card is not a credit card as there is no concept of credit. Using debit, you are simply spending the cash you already have on hand.

Don’t look any further

Find out which credit card is right for you

To verify your credit rating

In Canada, as a consumer, you can get a free copy of your credit report a certain amount of times per year by requesting a copy in writing. These requests are registered with credit agencies but have no impact on your credit score. 

Discover other tips and advice to better manage your personal finances by subscribing to National Bank’s newsletter.

Legal disclaimer

Any reproduction, in whole or in part, is strictly prohibited without the prior written consent of National Bank of Canada.

The articles and information on this website are protected by the copyright laws in effect in Canada or other countries, as applicable. The copyrights on the articles and information belong to the National Bank of Canada or other persons. Any reproduction, redistribution, electronic communication, including indirectly via a hyperlink, in whole or in part, of these articles and information and any other use thereof that is not explicitly authorized is prohibited without the prior written consent of the copyright owner.

The contents of this website must not be interpreted, considered or used as if it were financial, legal, fiscal, or other advice. National Bank and its partners in contents will not be liable for any damages that you may incur from such use.

This article is provided by National Bank, its subsidiaries and group entities for information purposes only, and creates no legal or contractual obligation for National Bank, its subsidiaries and group entities. The details of this service offering and the conditions herein are subject to change.

The hyperlinks in this article may redirect to external websites not administered by National Bank. The Bank cannot be held liable for the content of external websites or any damages caused by their use.

Views expressed in this article are those of the person being interviewed. They do not necessarily reflect the opinions of National Bank or its subsidiaries. For financial or business advice, please consult your National Bank advisor, financial planner or an industry professional (e.g., accountant, tax specialist or lawyer).

Tags :

Categories

Categories