Deborah Kearns
Beth Buczynski
Credit scores can change daily, with numerous factors driving your score up or down. If you like to keep close tabs on your credit, seeing an unexpected drop in your score can be alarming — but it’s not always cause for concern. And it isn’t the main thing consumers with a lot of debt should focus on first, says Cathy Plowman, a certified credit counselor with Credit Canada, a non-profit debt relief and credit counseling agency.
“They’re so focused on the score [that] they’re forgetting the fact they’ve got $40,000, $60,000 or $80,000 of debt they can’t pay down,” Plowman says. “And that’s the more important issue than the score because you can rebuild your score.”
How credit scores are calculated
Credit scores are three-digit numbers that help lenders assess your risk as a borrower based on your credit reporting history. Credit reports and scores are available through Canada’s two major credit bureaus, Equifax and TransUnion.
In Canada, credit scores range from 300 to 900. In 2023, the average Canadian had a credit score of 762, up five points from 757 in 2018, according to data from FICO.
Credit scores are calculated based on five key components, each accounting for the following share of your overall score:
- Payment history (35%).
- Outstanding debt (30%).
- Length of credit history (15%).
- New credit (10%).
- Credit mix (10%).
Higher scores show lenders that you’re able to repay your debts on time and manage your finances responsibly. And with higher scores, you’ll more easily qualify for loans and other forms of borrowing, typically with more favourable interest rates.
Factors that can cause sudden credit score drops
When your credit score suddenly falls, several issues could be at play. Here are some of the top items to look for.
- Missed or late payments. Payment history makes up a considerable share of your overall credit score. Even a single late or missed payment can lower your score.
- High credit utilizsation. Your credit utilization ratio is the percentage of available credit you’re using. If your account balances exceed 30% of your available credit, it could signal to lenders that you’re unable to manage additional debt responsibly.
- Applying for lots of new credit. Each time you apply to borrow money, lenders do a hard credit inquiry. Too many inquiries within a short time may indicate that you’re trying to take on too much debt.
- Lowered credit limit. Creditors will sometimes lower your available credit limit if a card is inactive or there are repayment issues, for example. A lower limit can lead to a higher credit utilization ratio, thus hurting your score.
- Closing or paying off accounts. Closing credit accounts shortens your credit history and reduces the amount of credit available to you, which increases your credit utilization. Likewise, paying off an installment loan with a long, positive account history may temporarily impact your score.
- Credit mix changes. A sudden change in the types of credit accounts, such as opening a new auto loan but cancelling a credit card or two, can also impact your score.
- Credit report errors. Mistakes on your credit report, such as inaccurate payment information or accounts that aren’t yours, can lower your credit score.
- Identity theft or fraud. If someone steals your identity and opens multiple accounts or goes on a shopping spree, your credit score will likely take a hit. Report stolen cards or suspected identity theft to your creditors immediately.
- Negative credit actions. If you’ve had a financial hardship resulting in a judgment, lien, delinquency, collections action, bankruptcy or foreclosure, your credit score can take a substantial hit. In this instance, there’s nothing you can do to remove these items from your credit report; you’ll have to wait until they eventually fall off. This can take several years in some cases.
8 steps to take if your credit score drops
- Review your credit report. Get a free copy of your credit report from Equifax and TransUnion, and carefully review them for errors or suspicious activity. Both credit bureaus update consumers’ credit scores monthly, and you can request your credit information online, by phone, in person or by mail, according to the Financial Consumer Agency of Canada.
- Dispute any errors. If you find mistakes or suspicious items on your credit report, dispute them with the credit bureaus immediately and alert your creditors, too. Provide supporting documentation and follow-up to ensure your reports are updated quickly.
- Pay your bills on time. Having a consistent history of on-time payments will help you improve and maintain a good credit score. Consider setting up automated payments or reminders so you don’t miss due dates. At the very least, make the minimum payments due. But, if possible, pay balances in full to avoid monthly interest charges.
- Reduce your credit utilization. Pay down your existing balances below 30% of your available credit limit, or consider requesting a credit limit increase to help boost your score. “It will take time to see those scores improve over time when you pay down debt, but you just need to have patience and perspective, and just good financial habits,” Plowman says.
- Limit new credit applications. Applying for too many new credit accounts, especially within a short time period, can hurt your credit score and be a red flag to lenders that you’re mismanaging your finances. Plowman says she sees this when consumers apply for multiple credit cards or loans to stay afloat on monthly bills, but are continually declined and reapply for more accounts. This rapid use of credit impacts your score, she notes.
- Keep your oldest accounts open. Avoid closing older accounts, especially ones you’ve had for many years. If you’re worried about overspending, keep older credit cards tucked away so you’re not tempted to use them but can still access them in an emergency.
- Diversify your credit mix. When you do apply for credit, especially if you’re a newcomer to Canada or establishing credit as a young adult, be intentional about choosing different types of credit. A diverse mix of credit cards and loans can improve your score.
- Monitor your credit closely. Keep tabs on your credit scores and reports from each credit bureau regularly. Plowman suggests checking your reports at least every six months to a year. Your bank or credit card company may also offer free access to your credit scores.
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