So when it’s time to make one of those life-changing purchases, most people have to approach their bank and ask for credit or a mortgage. Although, the banks don’t just hand out cash to anybody; to be approved for credit at any level you need to have a healthy credit score.

"Keep up to date with your bills and never make a late payment, because as well as being charged a late fee, you may also be reported to a credit bureau."

How credit is scored

“A credit score looks at all of the information on a consumer’s credit file and, depending on what specific product they’re applying for, calculates the likelihood of bankruptcy, payments going past due, or different levels of delinquency within certain times in the future,” explains Paul Lefevre, Director of Operations at Equifax.

Credit scores are rated on levels from R1-R9 (the best rating being R1).  R1 means that your credit payments have always been paid on time.

The credit score looks at different categories of your financial behaviour to collate this information. The biggest component (accounting for around 35 percent of the credit score) is payment history, which looks at how a consumer has managed and is managing their current portfolio of credit products. Next up is utilization, which accounts for around 30 percent of your score. This looks at amounts owed in comparison to credit limit on each product.

The next consideration is history, which is why managing your credit well over a sustained period has a significantly positive impact on your credit score. “You’ve got an R1 credit card and you’ve managed it really well, but you’ve only had it for three months,” says Lefevre. “A consumer who’s had that product for a more extended period of time is going to have a much better credit score.”

Another consideration that lenders take into account is the type of credit products that a consumer currently has, because banks associate a higher level of risk with retail credit products compared to car loans and mortgage debt.

How to improve your score

Credit scores usually range from 300 to 850 points, and the higher the score, the better your credit quality. But what tactics can people adopt to ensure that their credit score remains healthy?

Knowing your credit score is an important factor. It’s not necessary to wait until you’ve been denied credit to request a copy of your credit report; you can order one at any time from one of the two big credit-reporting agencies.

If you do notice any errors on your report, fix them. “Mistakes can happen, and these inaccuracies can lead to you being declined for credit,” explains Steve Webster, Vice President, Travel Cards, CIBC. “If you find a mistake on your report, notify the credit bureau. The lender in question will be contacted and if the information cannot be verified, it will be removed from your file.”

Looking forward

Keep up to date with your bills and never make a late payment, because as well as being charged a late fee, you may also be reported to a credit bureau. “Companies have different approaches to deciding when to declare a payment “delinquent,” but anytime you don’t pay on time, you are taking a risk with your credit rating,” says Webster.

Don’t request several credit products over a short period of time because that gets the alarm bells ringing at credit bureaus and financial institutions, especially if you don’t have a long and healthy credit history.

Finally, pay down your debt and keep on top of your current credit products. “Lenders consider how close you are to the limits on your various cards, how much you owe in proportion to the credit you have available, and the number of credit accounts for which you have outstanding balances,” Webster says.