Whether you’re applying for a personal loan, car loan or mortgage, credit scores play a huge part in how your application will turn out. To get the best loans, find out how credit scores work, what is considered a good credit score and how to improve your credit.
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What is a credit score?
In Canada, credit scores are three-digit numbers generally ranging from 300 to 900. They give insight into how likely you are to pay bills on time. So, when you apply for any loan, banks, credit unions and other financial institutions look at your credit score.
There are two main credit bureaus in Canada – Equifax and TransUnion. They keep your credit reports and use your credit information to calculate your credit score. Meaning, your Equifax score may be different from your TransUnion score.
What is a good credit score?
Since there are different credit bureaus, there’s no “magic number” that sets what’s considered a good credit score. Though financial institutions and lenders have varying standards, a higher credit score generally means you’re in a good spot.
The closer your score is to 900, the more lending opportunities you may have. For example, a good Equifax credit score starts at 660. So, borrowers with good (660+) to excellent credit (760+) commonly qualify for lower interest rates and more favourable terms.
Credit score ranges in Canada
While credit scoring models differ, here’s how Equifax categorizes your creditworthiness based on credit scores:
- Poor: 300 to 559
- Fair: 560 to 659
- Good: 660 to 724
- Very good: 725 to 759
- Excellent: 760 to 900
What affects your credit score?
Credit bureaus weigh criteria differently to calculate your credit scores. Though they vary, these factors usually affect your credit score:
Payment history
Your payment history details your past and current debt payments, including on-time payments, late payments and accounts that went to collections. It generally accounts for around 35% of your credit score – meaning, it has the biggest impact on your score. Be it on credit cards, loans or lines of credit, any late or missed payments hurt your credit score.
Credit utilization
Your credit utilization ratio measures how much of your available credit you use, and it shapes up 30% of your credit score. Say your credit limit is $20,000, and you’ve used $5,000. This means your credit utilization would be 25%.
In general, keeping your credit utilization below 30% can help you maintain a healthy credit profile.
Credit history
Your credit history records the length of time you’ve had your credit accounts open. This makes up 15% of your credit score. Generally speaking, credit bureaus want to see a positive long credit history. This gives the impression that you’re a reliable borrower.
Credit mix
The types of credit you have also influence your credit score. A combination of accounts, like credit cards, personal loans and car loans, helps you show you can handle different kinds of debt.
New loans
Each new loan requires a hard inquiry or hard credit check. Hard inquiries leave a mark on your credit report and bring your score down by a few points. Too many hard inquiries in a short period can raise red flags and may imply that you face financial difficulties.
How to increase your credit score?
A higher credit score means you’re a responsible customer, and this attracts potential lenders and creditors. If you have a shaky credit history, the good thing is you can improve your credit score. Here are some things you can do:
- Pay your bills on time
Since your payment history has the most effect on your credit score, it’s a good practice to pay your balances in full and on time. This will help you build a positive credit history and boost your credit score.
- Lower your credit utilization
Minimizing your credit utilization also has a major impact on your credit. That said, try to go below 30% of your available credit. For example, you can pay down your outstanding credit card balances.
- Avoid too many credit applications
Limit your loan applications since they drag your credit score down. If there are a lot of hard inquiries in a short time, this can also look bad to lenders.
- Monitor your credit report
Your own credit report may contain inaccuracies that can negatively affect your score, too. Request a free copy of your credit reports from Equifax and TransUnion. If you spot any mistakes, report them to the creditor or credit bureau.
- Build your credit early
If you’re just starting, consider getting a credit card to establish your credit history. But make sure you only use it for necessary purchases and pay your balance on time.
Frequently asked questions
Based on Equifax, credit scores of 660 to 724 are considered good while 725 to 759 are very good. Meanwhile, 760 to 900 scores are generally in the excellent credit range. Remember though that lenders and credit bureaus may vary in what they consider a good credit score.
The average credit score in Canada was 762 in 2023, according to a blog post from FICO.
You can check your credit score through Equifax and TransUnion. Equifax can provide your credit score online for free, but TransUnion requires a paid subscription unless you live in Quebec. Banks and some third-party providers can provide your credit score, too. Read our guide to getting a credit score.
Video: Understanding credit scores
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