Credit score: Why good financial behaviour can actually drag it down

So, what's your credit score? It's a bit like asking a woman how much she weighs, and the answer is fraught with just as much fear of judgment. But just like the number on the scale doesn't tell the whole story about your health, a pristine credit score is quite often not the symbol of financial virtuosity many believe it to be. In fact, some of the actions that drive up your score may actually drag down your finances.


1) The big 9-0-0

In Canada, credit scores are compiled by Equifax and TransUnion, both of which use a modified version of the credit scoring method called the FICO score. According to the Financial Consumer Agency of Canada, this score can range from 300 to 900, but exactly how your score is calculated is proprietary information (totally unfair, right?). What we do know is that a credit score is determined by your history of taking on debts and paying them off. (You can check out the precise combination of factors that go into your score here.)
So what about that canny gal who squirrels away her paycheques and pays for everything in cash? While she may be a paragon of financial responsibility by every sound measure, the bank thinks she's a deadbeat...which leads us to our next point.

2) No debt, no credit

Having a high credit score means you have to use debt, and that in itself, can be a problem — at least for some people. An open line of credit or unspent credit card balance can act as temptation or a tempest in a financial storm. Having and using credit is the best way for lenders to find out whether you're the type of person who takes care of business or walks out on her responsibilities. That makes sense. What doesn't quite add up is why those who come through with cash are stamped with a scarlet letter.


3) Testing your limits

Using a credit card will help you to build that ever-important credit history. But let's say you opt for a relatively modest credit card limit of say, $5,000. You don't want to get in over your head, right? To most people, this sounds like a reasonable use of credit. The credit scoring companies, however, may not see it that way — unless you're keeping the balance on that card under $1,200. You see, lenders like to see borrowers who spend about 25 percent of the credit that's available to them. This means if you want to use your card for a big purchase now and then, you'll need more credit, which, apparently, you aren't supposed to use.


4) Walking the credit line

Not only do credit scores favour borrowers who have more available credit, they reward borrowers who've done a lot of borrowing. The more types of debt you've had, the better — as long as you've paid it off on time, of course. This means that when it comes to your credit score, you're better off using a loan than paying in cash. The real catch-22 is that this loan will help boost your credit score and get lower interest rates on future loans. So essentially, you're paying interest to lower the interest rate on your next loan!


5) Debt's no problem

Paying off your debt is key to getting a top credit score. But there's a catch: when it comes to revolving credit like that used for a credit card or line of credit, whether you pay it all off or just the minimum is inconsequential. So while you don't actually need to pay a penny of interest to secure a good credit score, you also won't be punished if it takes you the rest of your life to pay off the balance.

6) Just in case

There's some solid truth behind that old cliché about putting your credit cards in the freezer (on ice, get it?) to keep you from overspending. Closing credit cards can actually hurt your credit score. Most sources say the ding won't be that big or last that long, but experts still advise against cancelling a credit card right before you go to apply for a loan. A credit card can represent two key aspects of keeping a high score: your credit history and your available credit. Based on what's best for your credit score, you should just tuck those pesky cards in between the ice cream and the Lean Cuisine and try to avoid temptation (good luck with that).