6 things you didn’t know could be hurting your credit rating

How’s your credit rating? Unless you’re looking for a mortgage or another type of loan, you probably don’t think about this very often—especially if you’re diligent about paying your bills. Your credit rating is probably good…right? Well, not necessarily, and that’s a surprise to many people. 

There’s more to a good credit rating than simply paying the bills on time, explains debt counsellor Brian Betz of Money Mentors, a non-profit credit agency in Calgary. While payment history counts for 35% of your score—which is calculated within a range of 300 to 900—the other determining factors break down as follows (and you’ll find more detail below):

• 30% credit utilization
• 15% length of your credit history
• 10% the number of credit inquiries on your report
• 10% the types and variety of credit you have

Staying on top of the lesser-known elements of credit can help you avoid nasty surprises, like being declined for a car loan or mortgage, or not qualifying for the best interest rates because you have so-so credit.

Here’s a look at six common ways that people may be hurting their credit ratings—and how you can improve yours.

1. You’re using too much of your total available credit

After paying accounts on time, the next most important element of your score is called credit utilization. This is the amount of your total available credit that you’re currently using, and it counts for 30% of your score. If you keep your credit cards and line of credit just shy of maxed out—making mostly minimum payments—lenders won’t be inclined to give you any more, says Betz.

Credit fix: Find additional funds to pay down these balances. Look first to your fixed expenses, says Shannon Lee Simmons, a Certified Financial Planner in Toronto and author of Living Debt Free and No-Regret Decisions. “If you’re able to get rid of cable or a couple of subscriptions and raise $100 a month between those, you can just replace it with automatic payments very easily. A little bit does go a long way.” Using online banking, it’s easy to set up an automatic payments to ensure that extra $100 doesn’t get eaten up by everyday spending at the grocery store or coffee shop.

2. You’re not demonstrating enough credit history

Naturally, lenders are more confident about applicants who have a traceable history of paying their bills. This represents 15% of your score. You begin to build credit the first time you have a cell phone in your name or use a credit card, and the longer you have an account, the better. What a lot of people don’t realize is that closing an old credit card you no longer wish to use can damage your credit by shortening your history.

Credit fix: “Typically what we say to clients is that if you have two credit cards and you only need one, then keep the one that you’ve had the longest,” says Betz. If a newer credit card has a rewards program or fee structure that better suits your needs, use that one for most transactions and—since some credit card companies suspend older cards if they go months without transactions—use the old one for just your music streaming service or some other small subscription.

3. You’ve avoided credit cards altogether

In the same vein, Simmons says she’s had clients who are so concerned about debt they don’t have a credit card at all. While that sounds like the most responsible choice—no card, no high-interest spending spree, right?—it often backfires. “If they’re trying to rent an apartment for the first time or do anything like that, they’re really having a hard time,” she says.

Credit fix: Simmons recommends getting a credit card with a low maximum balance of $500 or $1,000 and using it to automate payment of a cell phone bill or streaming subscription.

4. You’ve made too many applications in a short time

Another 10% of your credit rating hinges on whether you’ve had a lot of credit inquiries in a short period of time. “There are allowances made if you’re shopping for a car, and there’s five inquiries for that particular transaction,” says Betz. But if you’re applying haphazardly for various loan products, that signals to the bureau that you may be in a financial bind. 

It’s also helpful to know the difference between a credit score “hard check” and “soft check.” When a lender reviews your credit—say, when you apply for a loan, mortgage or credit card—this is a hard check, and it can lower your credit score by a few points. When a non-lender—including yourself, and a bank you already have an account with—reviews your credit, that’s a soft check, which doesn’t impact your score. If you’re shopping around for a new credit card, for example, look for online tools that let you check your eligibility without actually applying for a card.

Credit fix: Don’t apply for a new card or loan unless you really need it. It’s also best to avoid promotional offers at retail stores for a special discount off your purchase if you apply for a store card on the spot.

5. You don’t have enough types of credit

The final 10% of your credit rating is based on the types of credit you hold. The credit bureaus would rather you have a mortgage, line of credit or car loan than just a handful of credit cards.

Credit fix: If you only have cards, you may wish to add a line of credit and move some transactions there. Just like with investing, diversification can be good for your credit.

6. You don’t have a credit card with a major bank

Similarly, while credit cards are among the best tools for demonstrating and building good credit, they’re not all considered equal. Canada’s Big Six banking institutions are also known as “Schedule A” or “Schedule 1” banks. “More weight is given to a Schedule A bank than a store credit card,” explains Betz. The credit bureau knows there’s a guy at the grocery store who’ll track you down in the dairy aisle and set you up with a card—even if your credit is mediocre.

Credit fix: Ensure you have a major bank credit card in your name. Banks are choosier about their credit customers, so those cards raise your score faster.