What’s really behind your credit score?
If your credit score feels like some random (and slightly judgemental) number spit out by a computer in a locked room at the end of a long, winding hallway, you’re not alone. But here’s the truth: it’s a quick summary of how you’ve been using credit. And though it can feel intimidating, understanding your credit score is one of the most useful steps you can take towards building better financial habits.
First things first, what’s a credit score?
It’s a number between 300 and 900 that lenders use to help them decide whether or not to approve your application. Whether you’re applying for a credit card, a car loan, a line of credit or something else, your credit score gives them a snapshot of your credit report and past borrowing behaviour.
A higher score is more likely to get you approved and the good news is that you can improve it with healthy credit habits. Knowing your credit score, how it gets calculated and how to use free tools like Credit Keeper to track it can make all the difference in reaching your financial goals.
What actually impacts your score?
Different credit rating agencies use different formulas to calculate your score, but generally speaking, here’s what they look at:
Payment history
Do you pay your bills on time each month? Your track record for paying off debt is one of the biggest factors in your credit score. Even a single missed payment can hurt your score, so it’s worth setting up reminders to stay on track. For example, if you have a Capital One credit card, you can set up account alerts that give you a heads-up when your payments are coming due.
What you owe
This is the current debt on your credit cards and loans. Credit reporting agencies will look at how your debt compares to your available credit (also known as your credit utilization rate). Keeping this ratio low can really help your credit score over time. One way to do that is by paying more than the minimum each month, which will also have the added benefit of saving you money on interest.
Credit history
Credit reporting agencies look at how long you’ve been using credit, along with how many accounts you have and how old each one is. The longer your credit history, the better. That’s why it’s usually a good idea to keep older accounts open, even if you’re not using them regularly.
Hard inquiries/hits
Generally speaking, when you apply for credit, the lender runs a hard inquiry on your credit report. Because frequent applications can make you look riskier to lenders, this type of inquiry can hurt your score, especially if too many happen within a short amount of time.
One way to protect your score while shopping around for credit is to use soft inquiries to your advantage. For example, our free eligibility tool, Quick Check® can tell you which Capital One cards you’re likely to be approved for, before you apply and without harming your credit score.
Credit mix
Credit cards, car loans, mortgages — your credit mix covers the different types of credit accounts on your credit report. Though lenders like to see that you can manage different types of credit responsibly, compared to something like your payment history, your credit mix has a relatively low impact on your score.
Knowing your stuff is part of taking control of your credit
Knowing your credit score and what affects it is a big first step in taking charge of your finances. It’s not about being perfect or becoming a financial expert. It’s about staying curious, making improvements where you can and remembering that small steps add up over time.
* If Quick Check pre-approves a card, you can be sure we’ll approve your application, except in limited circumstances. Some of the reasons we may not approve your application, among others, include:
a. There’s been a change in your credit file information, personal information or financial status from the time you receive your Quick Check results to the time you apply for one of our credit cards.
b. You’re not at least the age of majority in the province or territory you live in.
c. Your application is flagged for fraud prevention.
d. You have an existing Capital One account.
e. You’ve applied for a Capital One account in the last 30 days or had an account with us that was not in good standing in the last year. In good standing means not past due, over limit, fraudulent, restricted, or part of a consumer credit counselling program or bankruptcy.
In some cases, we may not be able to open an account for you even though your application was approved. This can happen if we’re unable to verify your identity, or you don’t provide the required security funds if you’re approved for a Secured Mastercard®.