How Your Credit Score In Canada Works

Let’s be honest here, to be a successful travel hacker, you will need to get a lot of credit cards. However, if you’re afraid to apply for multiple credit cards, maybe it’s because you are afraid that doing so will negatively affect your credit score in Canada. Don’t worry, I got you covered! In this article, you will learn the exact breakdown of your credit score in Canada. That way, you will know how to keep your credit score healthy. Then, you can start applying for different credit cards and start earning tons of points and miles. All this while keeping your credit score in Canada excellent so that you will have no problems in the future if you need to get a mortgage or borrow money from the bank.

How your credit score in Canada works video

How your credit score in Canada works

Here is the breakdown of how your credit score is calculated:

• Payment History 35% – Are you paying your bills on time?
• Credit Utilization 30% – Are you using more than 30% of your available credit? If so, your credit score may decrease as a result.
• Length of Credit History – 15% – Average age of your accounts.
• Type of Credit Used 10% – Are you using a variety of credit?
• New Credit 10% – When you apply for a new credit card or other form of loans.

 

 

Let’s dig deeper:

Payment history – 35% of your credit score

Payment history is fairly straight forward. Just make sure you’re paying off your entire credit card balance on time. As a matter of fact, your credit score will go up as a result!

Credit utilization – 30% of your credit score

What about credit utilization? How does that work? Here’s an example:

Lets say you have three credit cards with their credit limit being $3,000, $2,000, and $5,000 respectively. If you add all three credit card’s limit, you will get a total of $10,000.

Since your goal is to make sure your credit score is healthy, you don’t want to use more than 30% of your available credit. What is 30% of $10,000? It’s $3,000. This means if you spend more than $3000, you will be utilizing over 30% of your available credit. As a result, your credit score will lose a few points. However, if you utilize your credit under 30%, in this case, under $3000, then your credit score will actually go up!

Some people are scared their credit score will drop if they cancel their existing credit cards. Is there any truth to this? There certainly is. Let’s say you have a balance of $3,000 from one of your credit cards. So far so good, you are at 30% utilization of your available credit. Using the same example above where you have three credit cards with limits of $3000, $2000, and $5,000, what will happen if you cancel the card with a $2,000 credit limit?

At $10,000 maximum credit available, your $3,000 credit balance falls within the 30% credit utilization. However, if you cancel the card with a $2,000 limit, the maximum credit you now have available is now $8,000. As a result, your $3,000 credit balance is no longer utilizing 30% of your available credit. The $3000 credit balance is now utilizing 37.5% of your available credit! And because you are now utilizing over 30% of your available credit, your credit score will drop as a result.

So before you cancel any of your credit cards, make sure you will still be under your 30% credit utilization. As a matter fact, just play it safe and make sure your balance is always paid off, fully!

This rule also applies to individual credit cards

Finally, the 30% credit utilization also applies to each of your credit cards. So even if you are below 30% credit utilization on all three credit cards combined, if your spend over 30% of your available credit on one of your credit cards, then you can expect your credit score to also drop by a few points.

For example, if your credit card has a $3000 limit and you spend $1000 on that card, you’re now utilizing 33% of that card’s available credit. As a result of using over 30% of your available credit, your credit score will drop. So if your credit card limit is $3000, you can safely use $900 which is exactly 30% of your available credit on that specific credit card.

Length of credit history – 15% of your credit score

If you are afraid that your credit score will drop when you cancel an existing credit card, then make sure you also understand how length of credit works.

If you are applying for new credit cards and cancelling them right away, then your credit score is bound to get hurt. The reasoning being is because the length of time you have held onto your credit card is not very long which will negatively affect your credit score.

In order to satisfy the requirements of the length of credit history, you will want to make sure to never cancel your oldest credit card. I still have my very first credit card that I got when I was 18 years old. It’s a cash back credit card from CIBC with no annual fee. The credit limit is only $500 and I’ve kept it all these years!

If you haven’t kept any of your old credit cards, it would be a good idea to find one credit card that you never plan to cancel. Pick a credit card with no annual fee and have it open for the rest of your life.

Another interesting note that I discovered is that despite paying off my student loan, the account is still open (after checking my credit score online). I believe this counts as another credit in my credit history that is helping me keep my credit score up. This means if you’ve ever applied for a student loan, despite paying back the entire amount, it might still count towards your credit length of history!

Type of credit used – 10% of your credit score

To positively impact your credit score through the type of credit used, you will want to have a variety of types of credit used.

Here are the categories under type of credit used:

Revolving (set limit of credit you can borrow)

• Credit cards
• Line of credit

Installment (scheduled payments over a set period of time)

• Student loans
• Personal loans
• Car loans

Open accounts

• Mobile phone plan
• Charge cards (American Express charge cards for example)

Mortgage

• Home
• Other real estate

One funny note, as I mentioned earlier, despite the fact I paid off my student loans already, this area is still active when I checked my credit score.

New credit – 10% of your credit score

This is what everyone is afraid of. Applying for a new credit card is only 10% of what affects your credit score. Yes, your credit score will drop a few single digit points when you apply for a new credit card. However, your credit score will bounce right back up as long as you are meeting the payment history, credit utilization, length of credit history, and type of credit used.

If you want to play it safe, then start slow and only apply for three new credit cards ever 6 months. Once you get the hang of how travel hacking works, you can increase the frequency of applying for a new credit card.

How to check your credit score

Nowadays, you can track your credit score for free through the following providers:

• Credit Karma
• Borrowell (my referral link)

I personally use Borrowell but I don’t think it matters which one you use. Just pick whichever one you like.

Conclusion

Now that you have a better understanding of how your credit score works, you can now make a rational decision when it comes to applying for credit cards.

Hopefully, we eliminated many of your fears when it comes to travel hacking. Now, you can begin to reap the rewards of acquiring tons of points and miles which you can use to travel cheaper, more frequently, and better.

So start applying for credit cards today and earn tons of sign up bonuses that you can use to travel to your dream destinations!

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