All About Credit Scores Ricky August 11, 2017

All About Credit Scores

“Doesn’t that ruin your credit?”

No doubt, it’s a lot of fun to travel the world on Miles & Points, sometimes in the upper echelons of luxury and always for pennies on the dollar.

But when you tell your friends and family that your glamorous travels are funded with credit card points, how many of them react with such incredulity?

It’s one of the biggest and most common myths in personal finance that signing up for lots of credit cards necessarily hurts your credit score.

In reality, there are several nuances about credit scores and credit in general, which determine whether the effect of opening new accounts on your score is positive or negative.

Don’t forget that credit card signup bonuses are by far the best way to earn lots of rewards points, so if you take the time to develop even a high-level grasp of how your credit score works, you’ll be well-equipped to apply for the best cards, grab the signup bonuses, and be on your way to maximizing your travel.

 

The Basics of Credit

Let’s start with some terminology. There are two credit bureaus in Canada: Equifax and TransUnion. Both companies keep records of personal consumer credit activity in Canada. Whenever you open a credit account (like a credit card, mortgage, or loan), the credit-issuing institution reports your credit activity to Equifax and TransUnion.

Equifax & TransUnion | Prince of Travel | Miles & Points

And whenever you apply for new credit, the potential issuer “checks in” with one or both of the credit bureaus to look at your credit information and payment history, so that it can assess your creditworthiness. This is known as a credit inquiry.

The credit bureaus keep track of all of your credit accounts and their details (such as opening date, credit limit, and payment history), as well as all of the credit inquiries they’ve received to your file. This is known as your credit report.

In addition, Equifax and TransUnion both use proprietary formulas to calculate a credit score. The score ranges between 300 and 900. Since they’re calculated differently, don’t be alarmed if your Equifax and TransUnion scores are different.

Both credit agencies offer monthly subscription services that allow you to monitor all of your personal credit information, as well as your credit score, though it’s almost never worth paying for these, since there are many alternatives available…

Checking Your Credit Score

CreditKarmathe American credit-monitoring giant, has recently arrived in Canada and offer an excellent service that allows you to see your TransUnion credit score and report for free.

Best of all, CreditKarma’s view into your credit report is updated weekly, allowing you to monitor your overall credit health quite reliably. It’s by far the best service that I’d recommend for the purpose of staying on top of your credit.

CreditKarma Screenshot | Prince of Travel | Miles & Points

Quite a few similar services have popped up in recent years as well, including Borrowell (Equifax, updated quarterly), Mogo (Equifax, updated monthly), and Ratehub (Equifax, one-time only). The CIBC and RBC mobile banking apps have recently introduced a feature to monitor your Equifax score as well.

There are even ways to order the information from Equifax and TransUnion directly without having to pay a monthly subscription. Equifax offers a free one-month trial period for their credit monitoring service, which can be used once every six months. Just be sure to cancel before 30 days have passed since you first sign up.

Meanwhile, TransUnion charges $16.95/month for their service, but Great Canadian Rebates is currently offering a $27 rebate for signing up. This means that you can pocket $10 just for checking your credit, providing you cancel the service before the first month is up!

How Is Your Credit Score Calculated?

The source of many people’s misconceptions regarding credit scores is a very simplistic view of how the score is calculated. It’s tempting to buy into the belief that “paying off your balances = good” and “applying for lots of credit = bad”.

As with many things in life, it’s not so black and white. Consider what generally goes into the calculation of Canadian credit scores:

  • Payment history makes up 35% of your score

  • Amounts owed and credit utilization make up 30% of your score

  • Length of credit history makes up 15% of your score

  • New credit applications make up 10% of your score

  • Credit types make up 10% of your score

Payment history is straightforward. As a card-crunching points traveller, you should always be making your payments on time, so this portion of your credit score should be 100% positive.

Utilization refers to what percentage of your available credit is actually being used – think about the closing balances on your credit cards relative to your credit limits, both in terms of individual cards and across all your credit cards. Generally, issuers want to see 5–10% utilization as a representation of ideal credit usage.

If you’re close to maxing out all your credit cards, that’s obviously a bad sign. Meanwhile, 0% utilization can also count against you, since it portrays a lack of credit activity – issuers want to see that you are demonstrating the ability to use credit responsibly, and $0 balances don’t indicate that.

The other three factors are also pretty straightforward: a longer credit history generally helps, a slew of recent credit inquiries generally hinders, and a more diversified credit portfolio (across products like credit cards, phone plans, lines of credit, mortgage, etc.) is usually looked up on favourably as an indicator of good credit management.

The important thing to note is the different weightings that are given to each factor. To address all your friends’ concerns, applying for a dozen new credit cards in one year might have a damaging effect on 10% of your score, but if you manage those new cards responsibly and keep your utilization within reasonable bounds, that’ll drastically help the 65% of your total score relating to payment history and utilization!

It’s therefore entirely possible (and quite likely, if you do things right) that your credit score will actually increase alongside your points balances. How’s that for a slick deal?

Now, before you get too hung up on that three-digit number that Equifax or TransUnion spits out, just remember one thing…

It Doesn’t Matter!

That’s right. For the purposes of chasing credit card welcome bonuses, your credit score itself doesn’t really matter. At least not the ones calculated by Equifax or TransUnion.

That’s because when you apply for a credit card, the issuer assesses your creditworthiness on the basis of your overall credit report. In fact, many issuers apply their own proprietary calculations – distinct from the credit bureaus’ – when looking at your payment history, utilization, etc. in order to determine whether or not to approve you for a new card.

So rather than worrying about your credit score as it looks on CreditKarma, you should focus on employing sustainable, long-term strategies to improve your credit, keep it in tip-top shape, and maximize your chances of getting your next credit card application approved. These include:

Excellent Credit | Prince of Travel | Miles & Points
  • Make all payments on time: This is a no-brainer. Always pay your balance in full prior to the due date; that’s the only way to come out ahead in this game.

  • Maintain 5–10% utilization, and definitely below 30%: If you’ve made a huge purchase this month and you’re running up to your credit limit, pre-pay the balance prior to the statement date to bring your utilization back down. Conversely, try to spend a small amount every now and then on cards you rarely use in order to generate “activity” on these cards and demonstrate responsible credit usage.

  • Know which issuers “pull” your credit from which bureau: Not all issuers will send a credit inquiry to both Equifax and TransUnion when you apply for new credit. Chase Canada, for example, sticks to Equifax only, while American Express and MBNA generally pull from TransUnion. Knowing this can help you time your applications to maximize chances of success.

  • Don’t cancel your oldest credit cards: These cards make up a big chunk of your “average age of accounts”, which is factored in to your overall creditworthiness. Leave your oldest credit accounts open forever! If you have to cancel to avoid annual fees, downgrade your card to a no-fee product instead.

  • Give it time: 10% of your overall credit health is determined by the length of your credit history. You might get a few declined applications when you first start applying for cards, but over the years, if you play your cards right (pun intended), you’ll be well on your way to seeing that lovely approval message every time there’s another big welcome bonus on the horizon!

Do all of this, and every time you apply for a new card, you’ll be presenting the issuer with a clean bill of health. No matter how they slice it with their fancy formulas and mysterious metrics, they won’t have a reason to deny you those sweet sweet rewards!

Conclusion

There’s so many myths and misconceptions surrounding credit scores and credit in general, and it’s also one of the most common questions I get from those new to the game. Rest assured that if you take the time to grasp how credit reporting works, you’ll be well on your way to maintaining a credit score in the 700–800 range, all the while being able to rack up even more rewards points to fund your travels.

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13 Comments
  1. Avatar
    T

    Just curious, not that I am too bothered by the score I get (just like school was xP)

    So lets say after 1 year, I have 4 cancelled cards (1 year old to make it simple) and keep 2 cards with no annual fee cards with 4 years history, how does that play into credit history? average out 6 cards of the total 12 years? so 2 years each? or is the calculation different?

    And about using credit, if I have a 5k limit and use 3k and pay off the 3k and use another 3k, technically I am over the 5k limit but the balance is 3k, does that affect it utilization?

    And is utilization calculated with the total credit limits, so total of 30k limit aim for less than 3k balance total or is it each card under 10%, 3k credit limit card have under 300, 12k card have under 1.2k, etc

    1. Avatar
      Ricky

      It’s my understanding that closed cards still count towards your Average Age of Accounts (AAoA) until they drop off the report at the 7-year mark. So you’d add up how long it’s been since you opened all your cards (even the ones you’ve since closed) and divide it out to find the AAoA.

      Utilization is based on the closing balance, so your utilization would still be 60%. You can "cycle through" your credit limit many times in one statement, although that’s generally frowned upon by the issuers.

      Each card under 10% is best, I believe.

      1. Avatar
        T

        Good to know
        Thank you

  2. Avatar
    Guest

    Yeah so since that hacker broke into capitalone, they are offering all their customers 2 years of free credit monitoring :D. Check you spam folder lol. Just don’t forget to add the cancel date on your calendar..

  3. Avatar
    NS

    What is your experience with charge card and their relationship with credit utilization? I’m seeing mixed answers from other bloggers.

    I.e I have 1 credit card revolving credit let’s say $1000, and I prepay monthly to keep it below 30% and the charge card appears under ‘Open’ and has no preset limit. Should I be prepaying my charge card too, so that my total statements are under $300 (30%)?

    1. Avatar
      Ricky

      Charge cards treat your highest-ever current balance as the credit limit. So if the highest balance you’ve ever had on a charge card is $5,000, then it’d be best to keep the balance under $1,500 going forwards.

  4. Avatar
    MH

    Hi Ricky,

    Does a mortgage, line of credit or car loan balance count towards the utilization? Or is it credit card balances as a % of total available credit on credit cards?

    Thanks!

  5. Avatar
    I.M.

    The oldest credit card I have is an Amex Air Miles card. I’ve given up on Air Miles but have kept the card because it’s my oldest. I also have another non-Air Miles Amex card. Am I safe to cancel my Amex Air Miles card in order to retain the credit history because I have another Amex card or should I just keep that card active (there isn’t an annual fee on it but I never use it)? Thanks.

  6. Avatar
    Myriam

    Hi Ricky
    I recently started travel hacking and applied for a platinum and a SPG card. As recommended, I signed up for credit karma and borrowel before the application to make sure I was ok with my score and to monitor it going forward. It’s been a month now and I just checked my score again. I was choked to see a drop of 60 points for equifax and of 20 for transunion. These two credit cards are the only out of the ordinary transactions I have done this past month. I went from being at 810 to 750. I know this is still a decent score but with such a drastic drop I’m worried that continuing the travel hacking will hurt my score. I checked the report but there is no late payment, no outstanding balance or over usage of credit limit that could explain the dropped.

    Have you encountered such a problem before? Thanks for your feedback!

    1. Avatar
      Ricky

      Hey Myriam,

      Your credit score should recover if you start using those new accounts responsibly and maintain a low utilization. How young/old is your credit profile? The newer your profile / average age of accounts, the more likely you’ll see a significant impact upon opening new credit cards.

      Cheers,
      Ricky

      1. Avatar
        Mdc

        Thanks Ricky! I just wanted to give an update for anyone reading this post. After two months, my credit score recovered 45 points so you were right. One thing I found interesting was that my score calculated by Equifax had lowered 60 points( and has now bounced back 45 points) whereas my Transunion score only moved 5 points. I’m definitely continuing travel hacking regardless though, it’s benefits far outweighs the few points it may take off credit scores! I have already started using hotels points for free travel and the gold status is sooo nice! Thanks for all your advice

  7. Avatar
    Steve

    Ricky does a 1-4% utilization look bad? Or should we aim at least 5%

    1. Avatar
      Ricky

      Hey Steve, I don’t think 1-4% would necessarily be bad – if there’s any difference at all it would be marginal.

Ricky

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