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A simple guide to credit scores in Canada 27.09.2021

A simple guide to credit scores in Canada

Your credit score is a three-digit number that represents the level of risk you pose when it comes to paying back your debts. It’s a snapshot or summary of the information contained in your credit report.

A higher score means you’re creditworthy, so you’re more likely to get a better deal when taking out personal loans, car loans, credit cards, mortgages, mobile phone contracts, or renting an apartment.

Understanding how credit scores work in Canada will help improve your rating and enable you to reap maximum benefits from your hard work.

How are credit scores calculated in Canada?

To begin with, there are two national credit bureaus in Canada – TransUnion and Equifax. These companies receive and compile information about your financial behavior from creditors you have dealt with. Typically, they consider the following five factors when calculating your score.

  • Payment history – 35%. Your payment history has the greatest impact on your score. It contains details such as existing and past debts and whether you’re making payments as agreed. This information also answers questions about how late your payments were (if any), whether your accounts are in collection, and if you have any bankruptcy filings or liens against you.
  • Credit utilization – 30%. This refers to the amount of credit you currently owe vs the amount that’s available to you. The rule of thumb is to keep your credit utilization rate below 35 or 30%. So, let’s say you have a borrowing limit of $10,000 on your credit card or line of credit. That means it’s best to owe $3,500 and below at any given time.
  • Length of credit history – 15%. This looks at whether you have been using credit consistently and how long your credit accounts have remained open. The longer your credit history, the better your score.
  • New applications – 10%. When you apply for credit, the lender has to perform a hard credit check to determine the risk you pose. If your credit report has too many inquiries in a short time, your score will be negatively impacted.
  • Credit mix -10%. Different credit accounts include personal loans, student loans, and other installment loans. It also includes revolving credit like credit cards and lines of credit. Having a variety of credit products shows you can handle most types of credit accounts responsibly.

What’s the score range in Canada?

TransUnion and Equifax use slightly different scoring models, but generally and according to Equifax, here’s a reliable take of credit score ranges in Canada.

  • 760 to 900 – Excellent. An excellent score gives you access to lower interest rates when applying for credit. It shows that you pose minimal risk to the lender.
  • 725 to 759 – Very good. If your rating falls within this range, creditors will still classify you as low risk, so it’s possible to get the best rates on the market.
  • 660 to 724 – Good. This is still an acceptable rating, and your loan applications are more likely to be approved.
  • 560 to 659 – Fair. Average scores may still get you approved for credit, but chances are you won’t be able to enjoy the same low rate as someone with a higher score.
  • 300-559 – Poor. A bad credit score tells lenders that you are at increased risk of defaulting. Therefore, you may be denied credit or offered a higher interest rate if approved.

How to improve your credit score

  1. Pay your bills on time
  2. Don’t apply for multiple credit accounts in a short time
  3. Check your credit reports regularly and get errors fixed
  4. Pay down your debt to keep the balance on your credit cards/lines of credit well below 35% of the limit
  5. Request an increase in borrowing limit to keep your credit utilization ratio in the correct range
  6. Maintain a good mix of credit account types
  7. Keep your oldest credit cards open
  8. Apply for a credit builder card

Credit Scores in Canada FAQs

What are the benefits of having a good credit score?

– Greater chance of loan approval
– Qualify for lower interest rates
– Higher borrowing limits
– Securing a rental apartment is easier
– Lower premiums on car and homeowners insurance
– Shows you’re financially responsible, which can help with getting a job
– Access to better reward cards, such as travel and cash-back reward cards
– Bragging rights and a greater sense of accomplishment

What’s the average credit score in Canada?

The average credit score in Canada is around 650, according to TransUnion.

Why are my Equifax and TransUnion scores different?

That’s because these two credit bureaus use different scoring models, and your creditors don’t always report to both agencies. In addition, your credit score constantly changes as the information in your credit file is updated at different times.

How can I get my credit report for free?

You can request a free credit report from Equifax or TransUnion by mail, phone, online, or in person.

What information is contained in my credit report?

– Personal information – name, address, date of birth, Social Insurance Number, etc.
– Credit account information – types of accounts you have, how much you owe, payment history, bankruptcies, and collection information.
– Inquiry information – how many soft and hard credit checks you have.

Will checking my credit score affect my credit?

No. When you check your score, this is a “soft pull” or “soft inquiry,” and it will not affect your rating. On the other hand, when you apply for a loan, the lender will request permission to perform a hard credit check, and this temporarily lowers your score.

How do I dispute errors in my credit report?

Contact the relevant credit bureau and ask them to look into the matter. Common errors or issues that may need to be fixed include incorrect personal information, incorrect listings, such as closed accounts that are still open, or negative information that’s overdue for removal. You should also contact the agency if you suspect identity theft or fraud.

How long does it take to improve my credit score?

Typically, improving your rating is not an overnight process. However, some short-term strategies, such as fixing credit report errors and paying down debt, can help you achieve quick gains. But keep in mind that missed and defaulted payments can stay on your report for years, so if you have those, it will take longer to get your score back on track.

Can I still get approval or a better interest rate if I have a low credit score?

Yes. The best way to do so is by adding security or a co-signer. A secured loan requires you to provide collateral, whether that’s your car or home. This lowers the lender’s risk because they can seize the asset if you default, so you get a lower rate.
Adding a co-signer with a better score also helps since you’ll both be responsible for payments. Again, this reduces the lender’s risk.

Does the lender only consider my credit score when applying for a loan?

No. The lender will also look at other factors, such as whether you have a stable income, other debts, or an asset to use as security.

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