Credit Score Basics

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One of the best ways to earn miles and points are with rewards credit cards. For example, the American Express Business Platinum Card is offering up to a whopping 75,000 Membership Rewards points for signing up and completing the minimum spend. That’s enough for a one-way First Class ticket from North America to Europe.

To do that, you must have good credit to get the card. This is why keeping your credit in good shape is as important as learning how to earn and redeem miles. Some people think that getting lots of credit cards are going to harm your credit. In reality, this actually doesn’t. Let me explain why.

Credit Score Canada – Credit Bureaus

When you apply for a credit card, the financial institution will perform a credit check. There are two many credit bureaus in Canada, Equifax and TransUnion. All credit card issuers view your file with one or both of these companies when you apply for a credit card. This check is known as a hard inquiry. Other companies, such as your telecom provider, may also pull your file if you are getting a phone on contract, for example.

If you don’t already have your credit score or report, there are multiple ways to get this without paying. For your free Equifax score, you can use Borrowell. For your TransUnion score, you can use Credit Karma. Both sites are secure and these companies have raised tens of millions of dollars from venture capital. This is a much better option than paying for a report directly with TransUnion or Equifax, which costs $20 or more.

Credit Score Canada Free - Borrowell

Credit Score Canada Free – Borrowell

Credit Score Canada – Components

Your credit score ranges from 300-900. An excellent credit score is in the high 700s. Anything above that will not significantly impact a credit decision, according to this Globe and Mail article. There are five components that determine your credit score.

1. Payment History – 35%

Payment history comprises the largest part of your score. The most crucial part is making your payments on time – even if it’s the minimum payment. Any late payments (30 or 60 days), accounts in collections, or negative public records will significantly lower your score. This has the largest impact to your credit score, because it puts into doubt whether you are able to repay new credit given to you. You will be declined for all premium/rewards credit cards if you have had a bankruptcy within the past 7 years, with the exception of American Express.

2. Utilization & Balances – 30%

This part of your score calculates how much of your credit you use. The metric for this is a percentage – credit utilized/credit available. This is one component that actually improves with more credit cards. For example, if you have only have one credit card with a $5,000 limit and you spend $3,000 per month, your credit utilization is 60%. However, if you have 5 credit cards open, each with a limit of $5,000, your utilization drops to 12%. Any utilization above 50% will affect your score. I always keep my credit utilization less than 10%, but that’s easy to do because I have many open credit card accounts.

3. Credit History Length – 15%

Credit history length is how long you have had credit. Your AAoA (Average Age of Accounts) is important here. If you have had many accounts opened for a long time, this part of your score will be excellent. A credit report should also show when all your accounts were opened. You should note how long your oldest account and try to never close it as it anchors your credit history length.

4. Credit Mix – 10%

Credit mix is whether you have different types of credit. There are two kinds of accounts – revolving and instalment. Revolving accounts are those you can make less than the full payment due, like credit cards, lines of credit, or retail store accounts. Instalment accounts are paid back over time. This include mortgages, auto loans, and other kinds of personal loans. It’s recommended to have both types of credit, especially if you don’t have a long credit history.

5. New Credit – 10%

New credit involves how many credit checks, or inquiries, you’ve had recently. Only hard inquiries (when a lender checks your report to make a lending decision) are counted – soft pulls do not. If you’re checking your own credit score, or are verifying your identity with a service, these do not count. Each credit inquiry stays on your report for 2 years. More inquiries will result in a lower score. This is also a minor part of your score.

Credit Score Canada - Components

Credit Score Canada – Components

From this chart, you can see that your two most important components are payment history and utilization – and those both are unaffected or improved with a new account.

What Happens When Applying for a Credit Card?

With a new application, this is the effects to each component:

  • Positive Impact: Credit Utilization

The new credit card will only decrease your credit utilization ratio if you continue spending the same amount on your credit cards.

  • Neutral Impact: Payment History, Credit Mix

As you already have credit cards, your credit mix will remain the same. If you also make payments on your new account, the amount of late payments and other derogatory items will remain at 0.

  • Minor Impact: Length of Credit History, New Credit

Opening a new card means that you will incur an credit check unless you’re pre-approved. However, this is only a minor impact as a hard inquiry will decrease your score generally less than 10 points. This decreases over time as well, since they get taken off your account after 24 months. Your length of credit history may also be reduced slightly – but if you have many old accounts anchoring your report, this is also negligible. In all cases, these stop being issues after your account has been open for a while.

To dispel the myth, your credit does not drop a lot if you have lots of credit cards open. I have over 20 credit cards open, and I’m doing just fine. All of this is pretty much exactly the same in the US, except they have Experian, an additional credit bureau. See whether a financial issuer pulls Equifax or TransUnion for a new account.

The only word of caution I’d give out are for folks with thin files. If you don’t have enough history, you may be declined with the reason “too many new accounts open” or “too many recent inquiries.” This is because lenders are afraid that that people will get too much credit all at once and then default. This makes sense, especially if you only have one $5,000 limit credit card open, then don’t apply for three more accounts all at once.

When Should You Not Get a Credit Card?

I’m lucky that managing my finances has always been easy. Credit cards aren’t free money, and you shouldn’t be treating them as an ATM. If you don’t pay off all your balances in full right now, don’t open a new card. Credit card debt usually comes with a 20% APR interest rate, so that negates any rewards points you will earn. Make sure you pay that off first.

Note: I’m not a financial advisor or other financial professional of any kind. This content is for informational purposes only and is not professional or personal advice. Please see my Terms of Use for more details.

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  1. Right, but there is more to credit card approve/decline decisions than you describe.

    For example, I was declined for Scotia Amex based on my UNUSED HELOC.

    If Scotia only used criteria described above, then my unused credit line would be a huge plus, because it would push utilization % down.

    However, Scotia credit officer told me they used another measure: debt service ratio. And to calculate it, they assumed 1% of all open unused credit lines must be paid monthly. Given a 5-figure HELOC limit, this of course screwed up my debt service ratio. Therefore, Scotia declined my Amex application, despite high-700 credit score and otherwise stellar credit.

    So having many credit cards or high limit lines of credit open, may actually lead to being declined for new credit cards in some circumstances.

  2. Very good posting. Thank you. I have a question for you. You mentioned utilization of credit limit below 50% is important. I have 3 credit card with a total limit of $31K. I do not carry any balance and use less than 10% of limit monthly with my credit cards. I also have 2 line of credit a total limit of $68k and have $56k in balance. I was wondering the credit limit/ balance utilization is only including credit card limit or it is also including line of credit limit and its balance? When I calculate my utilization, my line of credit only utilization rate is above 50% but if I combine it with credit card limit it is below 5%.

    I recently closed two other credit cards I used to have because my banker told me I have too many credit products and underwriter will flag it if I apply for a new bank product. I am planing to apply a new mortgage next year. Is the bank correct? Because from your post, it seems like having more credit help to reduce utilization rate and gain more credit history.


    • If you are planning to get a mortgage next year, that’s more important than than getting any additional credit cards. I would avoid additional inquiries to start. Note that the approval process for a mortgage is completely different than one for a credit card, so it’d be best to speak with your banker or financial advisor to figure out what to do.

  3. Your link to Borrowell gets hijacked to some other VPN site. so I will have to go directly to them



  4. I think it’s stupid to wait 6 mounth stocks make a new account it doesn’t matter were I go I can’t get to see my credit score

  5. I was told that paying off my credit card every time i use it during the month wont help boost my overall credit score. I was told to wait until the bill came out and pay it at the same time every month.

    Is it true that paying the bill before its due isn’t a good idea?

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