How Your Loans and Spending Habits Impact Your Credit Score

A credit score typically ranges from 300 to 900 and is used to estimate how likely a borrower is to repay debt on time. This number plays a key role in lending decisions, including loan approvals, interest rates, and credit limits. Generally, a higher score reflects stronger creditworthiness.

While some credit products may influence a score more than others, overall behaviour — such as spending patterns and payment habits — plays the biggest role. Credit scores are calculated using complex formulas that analyze borrowing data.

These scoring systems continue to evolve over time as new types of credit products are introduced and more borrowing information becomes available. For example, certain types of loans were not always included in scoring models in the past, but today most modern scoring systems consider a wider range of credit activity.

Having a mix of credit products — sometimes called a credit mix — can play a role in determining a score, but it is not the most important factor. A varied mix of well-managed accounts may be helpful, but it cannot make up for missed or late payments.

In many cases, revolving credit products, such as credit cards or lines of credit, can have a stronger influence on credit scores. These types of accounts provide ongoing insight into how consistently someone manages their borrowing. Missing payments on these accounts can signal a higher likelihood of future missed payments.

Another key factor is credit utilization, which measures how much credit is being used compared with the total available credit. Keeping balances relatively low — ideally below about 30% to 40% of available limits — can help maintain a healthy score. High utilization levels, especially approaching maximum limits, may indicate financial strain.

Installment loans, such as auto loans, personal loans, or student loans, demonstrate the ability to make fixed payments on schedule. Long-term loans, including mortgages, reflect the ability to manage repayment over extended periods. Each type of loan contributes differently to a borrower’s overall credit profile.

The most significant factor affecting a credit score is payment history — specifically whether bills are paid on time and how long any payments remain overdue. The total amount of debt owed is also an important consideration, including balances across all accounts and the portion of available credit that has been used.

The length of credit history is another factor. This includes how long accounts have been open, the age of the oldest account, the age of newer accounts, and the average age of all accounts combined.

Applying for multiple credit products within a short period can also lower a credit score. Frequent applications may suggest financial pressure or increased borrowing risk. When lenders review applications, they may consider recent credit inquiries as part of their assessment.

Credit checks remain on a credit file for several years, although reviewing your own credit report or receiving certain pre-approval offers typically does not affect your score.

In addition, having access to large amounts of unused credit may influence lending decisions. Even if no balance is owed, lenders may factor in the possibility that unused credit could be drawn upon in the future, increasing overall borrowing risk.

Overall, maintaining consistent payment habits, managing balances carefully, and using credit responsibly are the most effective ways to build and protect a strong credit score.

Source: Canadian Mortgage Trends