How Credit Cards Affect Your Credit Score

What Is A Credit Score?

Canada has two credit bureaus that track your credit score in Canada: Equifax and Transunion. Each time you apply to open a credit account in whatever form it may be (loan, mortgage, credit card, etc) the potential issuer checks with one or both of the credit bureaus to look at your credit information and payment history, to assess your credit reliability. This is known as a credit inquiry.

Your credit report consists of all of your credit account details including opening date, credit limit, payment history and all credit inquiries.

Equifax and Transunion use their own formulas to take all of your credit information and turn it into a number. This is your credit score. It is always a number between 300-900. As mentioned, they use their own formulas so your Equifax and Transunion credit scores will often differ.

How Can I Check My Credit Score In Canada?

In Canada, you can check your score for free, without hurting your score, a couple of different ways:

Our personal favourite is CreditKarma for several reasons: It tracks your score for you, it updates weekly, it shows you the balance on your credit cards, your payment history and all credit inquiries. It also alerts you every time there is a new inquiry into your account to protect yourself from fraud. It is the most detailed way to get your credit score in Canada and it’s free. CreditKarma only checks your TransUnion score, though. To look at our Equifax score we have to go elsewhere. If you bank with Scotiabank, they will show you your TransUnion credit score for free.

Mogo is where I go to check my Equifax credit score and it updates your score monthly. It is not as comprehensive as CreditKarma, but it does the job of giving you your score and alerting you of any new inquiries on your account to protect you from fraud. And it is also free. Others that people use are Borrowell which updates your score quarterly and RateHub which updates your score quarterly. Both are free. If you bank with CIBC or RBC they also have programs to track your Equifax score for free.

What Makes Up Your Credit Score In Canada?

Before I started churning my concept of credit scores was, applying for lots of credit cards is bad and paying off your balance on time and in full is good. I wasn’t wrong but that definitely wasn’t the whole picture. Here is how your credit score is calculated:

  • Payment history – 35% of your score
  • Amounts owed/credit utilization – 30% of your score
  • Average age of accounts – 15% of your score
  • New credit inquiries – 10% of your score
  • Credit types – 10% of your score

Payment history is pretty self-explanatory. You should always be paying your balance off each month and in full, which should make this part of your score perfect.

Credit utilization refers to the percentage of your available credit you are using. Most issuers want to see your utilization between 5-10%. For example, if you have a card with a $10,000 credit limit, you should try to always keep your balance under $1,000. This means you may be paying down your balance multiple times per month.

Your average age of accounts is also pretty self-explanatory. The higher your average age of accounts, the better. This is why you should NEVER cancel the credit card or cards you’ve had for the longest amount of time.

New credit inquiries we talked about earlier, but generally, a lot of credit inquiries will lower your score.

Credit types means that the issuer wants to see that you are diversified in the types of credit accounts you have. These can be things like credit cards, phone plans, mortgages, lines of credit, etc. The more responsible you are with different types of credit works in your favour.

As you can see, credit inquiries only account for 10% of your credit score and only for a short period of time. Generally, your score recovers from each credit hit after about 3 months.

The funny thing is, many people’s scores actually increase with churning because their utilization goes down, due to their amount of available credit going up but their spending habits staying the same, and they manage their credit more responsibly with their payments.

In the end, the number doesn’t matter. That’s because issuers look at your overall credit report, not your score. They assess your credit reliability based on their own calculations of your credit report. Each issuer weighs things differently and cares about some things more than others. Many issuers could care less about what your actual score is. Your score should just be used as a guideline for your overall credit health.

Tips For A Healthy Credit Score

Pay the balance in full and on time. You should be doing this anyway but if you aren’t, start now.

Keep your utilization between 5-10%. As mentioned earlier, this is ideal. If you had to ask me what the max is before it starts to look bad I would say 30% should be your absolute maximum.

Keep your longest held card. That card you got when you turned 19 and you never use anymore, keep it because it lengthens your average age of the account and works in your favour. You don’t have to use it, but at least keep it.

Know which credit bureau the issuer is checking. Here is a list of which credit bureau is check by which issuers:

Transunion – AMEX, CAA MC, Canadian Tire, MBNA (sometimes both), Rogers Bank, RBC, Scotiabank, Tangerine, VanCity, Walmart MC

Equifax – AMEX (on occasion), CIBC, Chase Citi, Desjardins, HSBC, MBNA (TU first but sometimes both), National Bank, PC, TD

Both – Capital One

How Credit Cards Affect Your Credit Score Bottom Line

All in all, credit cards aren’t as scary as many people think they are. There’s no need to fear what they will do to your credit score as long as you’re responsible and you follow the tips above. It’s normal if your credit score takes an initial dip, but that’s nothing to worry about as it’s bound to bounce back within a few months as long as you are paying on time and keeping your utilization low as that right there is 65% of your credit score in Canada. Credit cards are a great way to earn points for travel and should be utilized in that way instead of being feared for their effect on your credit score. To learn more about earning travel points with your credits cards, find out how we can help you earn lots of points in a short amount of time.