Loans & Credit

How Canadian Credit Scoring Works

credit score canada

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Learn more about regularly monitoring your credit report, things you can do to improve your credit score and what you should do to avoid ruining it.

Your credit score is a number that evaluates the information in your credit report. In Canada, a person’s credit score is determined by two main bureaus: Equifax and TransUnion. These entities collect data on your credit history, analyze your habits, and then give you a score. Along with a more fulsome credit report, they calculate a three-digit number. This is your credit score. Read on to learn about what is a good credit score in Canada, why it matters, and how you can raise your credit score.

Credit Score Range in Canada

Canada has a credit score range between 300 and 900. The lower your score, the less likely you are to be approved for a credit card or loan. Here’s a closer look at the rating ranges:

Credit Scores in Canada: At a Glance
ExcellentGoodFair/AverageBelow AveragePoor
741 - 900690 – 740660 - 689575 - 659300 - 574
-Few or no late
payments
-Regularly pay in full
-Low credit utilization
-Most payments on time
-Low credit utilization
-Some late payments
-Many lenders
-May have defaulted
-Many late or incomplete payments
-High levels of debt
-Many defaults
-Carry a lot of debt
-Use multiple lenders
-May have declared bankruptcy

What is a Good Credit Score?

Obviously, the higher the score, the more attractive you are to creditors – it’s a sign of financial responsibility and that you’re less likely to default on your loan repayments. A good credit score indicates that you’ve been responsible with your credit accounts and have paid on time. A bad credit score reveals the opposite: that you haven’t paid your accounts on time or that you’ve had to file bankruptcy to deal with your debt. Here’s how the credit ratings are broken down:

  • Excellent (741 to 900): You’re a credit superstar! The financial doors will be wide open for you: expect rapid approval for credit card and loan applications, the lowest interest rates, high credit and loan limits, and access to premium credit card benefits.
  • Good (690-740): Looking good! Although your score could use a boost, you’ll still enjoy the best financial products and perks, and it’s unlikely that you’ll have trouble obtaining most credit products and loans.
  • Fair/Average (660-689): This is a decent credit score that won’t hold you back too much. The lowest interest rates may not be available to you, but you can improve this credit score.
  • Below Average (575-659): You’ve got some work to do. If you fall into this range, you’ll likely encounter higher interest rates for lines of credit as well as difficulty getting the best rewards credit cards.
  • Poor (300-574): If you’re in this range, start doing damage control on your credit history pronto. It’s going to be quite a challenge to get credit or a loan.

In general, a rating above 690 is considered a good credit score in Canada, and is reserved for borrowers who make most of their payments on time and in full and don’t carry high levels of debt. If you’ve got a credit score of 750 or so, you’re in excellent shape.

Why Is a Good Credit Score Important?

Your credit score is very important! It’s used by lenders to assess the amount of risk they face in extending credit to you. Your credit score can affect:

  • Getting a credit card. The higher your score, the better your lending options become.
  • Renting a home. Believe it or not, landlords are allowed by law to ask for your credit history.
  • Buying a home. Not only will a good credit score entice lenders, but it can also help you get a lower interest rate on your mortgage.
  • Qualifying for the best personal loan interest rates. The better your credit score, the lower the interest rate you can negotiate.
  • Getting a job. Some jobs in Canada require applicants to pass a credit check.

Lenders place a lot of importance on credit scores during the credit application process because research shows that consumers with the highest scores are the least likely to default on their credit cards and loans. On the other hand, delinquency rates are very high with borrowers with credit scores below 600.

A good credit score puts you in the best position to be approved for many credit cards and personal loans without having to go through a rigorous application process. Of course, mortgage and auto loan applications will still be a fairly intense process, even with a great credit score. But not only does having a good credit score improve your chances of being approved, but it also lets you negotiate the best terms and interest rates on the loans you’re approved for. You may even have more access to instant approval loans and credit cards.

Not only that, but a good credit score can mean paying much lower interest rates on your existing debt. For instance, if you have a car loan or take out a small line of credit to do home renovations, you will pay much less going forward if you have an excellent credit score.

That being said, it’s not impossible to get a personal loan with bad credit. You can apply with a bad credit lender — private lenders for personal loans, and there are several in Canada. For the best of the bunch, check out our article on The Best Bad Credit Loans in Canada. If you don’t need a loan just yet and want to work on improving your credit score now, there are apps that can help with that as well.

The bottom line: few people realize just how important your credit number is. With all these benefits plus the promise of better credit options at lower rates, having a healthy credit score is a worthy goal. It could potentially affect your wallet big time.

How Can I Get My Credit Score?

Since there’s so much mystery surrounding credit scores, you might be wondering how to find yours. Luckily, you can get a free credit score check with the Canadian financial technology company Borrowell, and looking it up won’t affect your credit score.

You can also order your credit report from either (or both) of the two credit bureau websites: Equifax.ca and TransUnion.ca.

It’s worthwhile to review your credit report for errors, which can ultimately impact your score. If you do find any errors, contact the credit reporting agency and ask them to investigate.

You can also check out our ‘credit score calculator’ which can give you an estimation of where your credit score stands at.

What Affects Your Credit Score?

There are many different factors that affect your credit score in Canada. Your credit score reflects your credit history, so obviously paying your credit cards each month —in full, if possible, but failing that, a minimum payment — is crucial. But your credit history is affected by far more than your credit cards. Consider the following list of things that can affect your credit score:

  • The number of credit accounts in your name
  • Carrying high balances on cards or loans (Any credit card balance that’s above 35% of the credit limit is too high)
  • Numerous applications for credit
  • Late or missed payments
  • Applying for too many credit cards or loans within the past 12 months.
  • Having a short credit history.

Equifax and TransUnion both have different ways of calculating credit ratings, but there are some overlapping factors that matter. Let’s look at a few factors in-depth.

Payment History

The most important factor influencing your credit score is payment history. It’s kind of like a report card that grades your spending and loan/credit repayment. Your payment history details all of your consumer debt (excluding mortgages) including whether you’ve paid off, deferred, or defaulted on your debts; made late payments; whether you’ve still got debt outstanding; and whether you’ve ever filed for bankruptcy. Another factor is repayment history: the longer it takes to pay off your loans, including those from cash advance sources, the more your credit score is affected. Since creditors aren’t psychic, payment history offers one way to reasonably predict how likely you are to repay a loan, and ultimately influences their decision whether to lend you money.

Credit Utilization

“Credit utilization” refers to the amount of credit that you are using compared to the amount that is granted to you. So if you have a credit card with a $1000 credit limit, and your balance is $200 on that card, it translates to a 20% credit utilization. In general, it’s a wise idea to keep your total credit utilization (meaning across all credit products) to under 30%.

Length of Credit History

Lenders love customers with long-term credit histories showing that they’ve used credit consistently over many years. Meanwhile, a short credit history or not using an allotted credit may be red-flagged, perceived by creditors as being a risk factor for defaulting on balances.

Age

Continuing with the above discussion and of particular interest to millennials, there is also a correlation between credit score and age. In general, the younger a person is, the lower their score. This is not entirely attributable to financial responsibility or lack thereof. Along with payment history and debt owed, credit score takes into account the length of your credit history, the number of applications for new credit, and the variety of credit products you’re using. These last three factors are typically tied to age.

Soft and Hard Credit Checks

Whether you’re applying for a bank loan, apartment rental, or credit card, someone is bound to ask you for a credit check at some point in your life. There are two types of checks in Canada, with the first being a “soft check.” This is when you or another person checks your credit score for non-lending purposes. Despite what you may have heard, the good news is that it doesn’t negatively impact your credit score.

However, a “hard check” can cause your credit rating to drop. It occurs every time you apply for a credit card or loan, and having too many hard checks in your credit history during a condensed time period can knock off 7-10 points. Knowing this, just be careful about applying for too many credit products at once.

Diversity of Credit

Just like smart investors diversify their investment portfolios, you should do the same in the credit world. Lenders like it when your credit history shows a variety of credit types, and when you demonstrate financial responsibility with each of them.

Having No Credit History

If you’ve never borrowed money or had a credit card, you may have a blank credit report. No credit history doesn’t give the best impression to lenders, and there’s nothing proving that you’ll repay a loan on time (or at all!). It can actually be just as bad or even worse than a bad credit history and jeopardize your chances of receiving a loan when you need it.

How to Raise Your Credit Score

Once you have your number, you can see where you fall on the scale and what options might be available to you. Unless you’re in the top 20% or so of Canadian borrowers, you likely have some room to improve. Here are some tips on how to improve your credit score in Canada:

Repay your debt

Paying your debt in full and on time is the best way to build or rebuild your score, but bear in mind that this is not limited to your credit cards. Demonstrating responsibility with your cellphone or utility bills will also have a positive effect.

Paying balances quickly will also help since high loan and credit card balances negatively affect your credit score. If you’re in the red, think about getting a balance transfer credit card with a lower interest rate. It’s one of the best ways to pay off credit card debt fast.

Minimize your credit utilization

Don’t apply for more credit than you need, and keep your debt load low in comparison to the amount of credit extended (resist the urge to max out your cards).

Keep your (healthy) credit history going

Maintaining a long credit history helps, as does the responsible use of different types of credit. Your history with a car or RRSP loan affects your score just as much as your credit card use.

Avoid unnecessary credit checks

Keep hard credit checks to a minimum. If you’re prone to “credit churning” (whereby you apply for credit cards with sign-up bonuses and then cancel your membership after collecting the rewards), remember that this will likely ding your credit score. If you’re trying to improve your credit score, keep new credit applications to a minimum.

Correct outdated or wrong information

Look at your credit history for any errors or omissions, any open credit lines, or negative info that’s older than seven years. If you see anything wonky, get it fixed ASAP. According to Borrowell, there’s a statistical correlation between regularly monitoring your credit report and improving your score.

Use apps to improve your score

There are reputable personal finance apps that promise to improve your credit score within six months for a low monthly fee. These apps and tools work by using deposited cash to issue you a small loan, and then they report monthly repayments on these loans to major credit bureaus. These regular, on-time payments will improve your credit score. There is usually a monthly fee for this service.

Keep your plastic

After paying off a credit card in full, don’t immediately cut up the card. It’s in your interest to carry your paid-off credit cards in your wallet for a while longer, just to build up a low credit utilization. If you’ve got a bad credit score, think about applying for one of the best credit cards for bad credit in Canada. It will help you get on the road to repairing your credit score.

Get Automated Advice

We know—it’s a lot to manage. Luckily, in Canada, there are tools that can help. For analyzing and taking action on a low credit score, consider MyMarble. This tool is designed with boosting your numbers in mind. When you sign up, you’ll connect your bank accounts and see a detailed overview of your financial health, along with your credit score. You’ll have access to Maestro, which offers over 25 modules of learning material about budgeting, credit, and debt, and other paid tools that can help boost your credit score.

Final Words

For those aspiring to obtain a good credit score in Canada, you’ve got to aim for 690 or higher. Luckily, there are a few simple things you can do to improve your credit score and get in the good books with creditors. With lenders reserving the best products and rates for those with the highest credit scores, it makes money sense to put a little effort into yours and build your best profile. Good luck!



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