Most Canadians know their credit rating is a number, somewhere between 300 and 900, that generally reflects your credit-worthiness and is used to secure approval from lenders. But the fact is, nobody outside of the ratings agencies knows exactly how they work.

Canada鈥檚 two credit rating agencies -- Equifax and TransUnion -- do not publicly reveal the exact formula used to calculate your score in order to keep people from gaming the system. However, there are some basic indicators you can use to improve your standing.

Personal finance coach David Lester joined CTV鈥檚 Your Morning on Thursday, to clear up some misconceptions and outline some simple steps you can take to increase your score.

Credit ratings, he explains, are broadly determined by five weighted factors:

  • Payment history (35 per cent)
     
  • Amount owed (30 per cent)
     
  • Length of history (15 per cent)
     
  • New credit (10 per cent)
     
  • Types of credit used (10 per cent)

Here are four things Lester said you need to know about how to improve your credit rating:

Having a zero balance on your credit card can have a negative impact

Lending money is a business, and financial institutions want to make sure they make money by charging interest.

鈥淚f you pay off your debt all the time, and you don鈥檛 pay any interest, that actually hurts your credit rating because they want to know that you are going to pay a little bit of interest,鈥� Lester said.

He said it is important to remember that a credit score is a measure of how much lenders want your business. They are designed with banks in mind, not you. While that zero balance may help you sleep at night, avoiding as much interest as possible does not necessarily win you any favours.

Keep your first credit card

Remember that credit card you signed up for in your first year of university while wandering around campus on frosh week? It鈥檚 probably the genesis of your credit managing history, so keep it active to show lenders you have been responsibly managing debt since your college days.

鈥淭hey (lenders) like that you鈥檝e been borrowing money and paying it back for a long time,鈥� Lester said.

Credit diversity is a good thing

So you have a car loan, outstanding student debt, a mortgage, and a few charges on your credit card. How will this impact your credit score? The answer depends on how well you are managing all those debt obligations. But, broadly speaking, diversity is good.

鈥淭hey like a plethora of types of loans. If you have all of those under control, and you are doing well on all of them, then it will affect your score (positively),鈥� Lester said.

Do your homework, because credit ratings are prone to errors

Don鈥檛 be surprised if you pull your credit report and discover an error. Lester estimates about 30 per cent contain mistakes, some of which could saddle you with a higher interest rate or see you denied credit all together.

If you find something wrong, flag it with the credit agency as soon as possible and stay on top of your records on an annual basis.

鈥淚t鈥檚 really important to do that every year. Just go through and make sure there aren鈥檛 any little mistakes on your credit rating,鈥� Lester said. 鈥淵ou want to make sure that you clear those up, and it will boost your rate.鈥�