Credit Scores in Canada: A Comprehensive Guide

When did you last apply for a credit card, mortgage or line of credit? Do you remember hearing the word “credit score” thrown around? Lenders use credit scores to help them decide whether to lend to you. For example, a high credit score may help you get a loan, while a low credit score may be a factor for rejection.

But what exactly is a credit score, and why does it matter? In this guide, we’ll cover all of that, plus how to check your credit score and the factors that affect it.

What are credit scores?

A credit score is a number between 300 and 900 that helps lenders evaluate your likelihood of repaying your debt. Think of it as a score on an exam, and the exam as a lifetime record of credit repayment.

Credit scores numerically summarize your credit behavior based on the information in your credit report. While your credit score is an easy reference, your credit report is a more comprehensive snapshot of your credit history. It documents your open credit accounts, including debts, late payments, and more.

A high credit score makes it easier for you to access credit, such as mortgages, car loans, personal loans, and lines of credit.

A low credit score makes lenders wary of lending you money, making it more difficult to get credit. However, you may be approved for a loan, albeit at a higher interest rate.

So, what level does your credit score need to be to get an A+? It depends on which credit bureau you apply to. Equifax You see, a good credit score is between 660 to 724. Here are some other ranges to help you evaluate your score:

• More than 760: excellent

• 725 to 759: very good

• From 660 to 724: good

• From 560 to 659: justice

• Under 560: poor
  

Why is your credit score important?

Your credit score can affect everything from your ability to get a car loan to your eligibility to rent an apartment. Your credit score may be higher Resulting in a smaller security deposit When you negotiate a lease, lower interest rates on loans, more job opportunities.

Learn more about why your credit score is important.

How credit scores affect rent and employment

Canada It has no minimum credit score requirements To rent an apartment. However, many landlords will look at your credit score as a way to gauge how reliable you are at paying rent on time.

If you have good credit, they may offer more favorable terms, such as a lower deposit. Your credit score will also affect how some employers view you and where they rank you as a candidate. A high score can show that you are responsible with money and, therefore, trustworthy.

What does it mean when your credit score drops?

Your credit score can drop for several reasons.

If you apply for a credit card or loan, the lender will run your credit report (called a hard credit inquiry), which will have a slight impact on your overall score. Large declines are usually attributed to maxing out credit cards, missing payments, or defaulting on loans.

Do your best to avoid these issues, as it can take months or even years for your scores to recover after a big hit. Here are factors to consider that may affect your credit score:

Factors that affect your credit score

There are many factors that contribute to your Canadian credit score.

Payment date (35%): The minimum you need to achieve to have a positive payment history is the minimum monthly payment on your debts. Since payment history is the heaviest factor in your credit score, you should pay on time, every time. Missing multiple payments could send your debts into collections, repossession, and foreclosure — all of which affect your credit score.

Credit Usage (30%): Your credit score can be negatively affected if you use too much of your available credit, also known as credit utilization. Let’s say you have $20,000 in available credit and have used up $18,000. Even if you make the minimum payments, your credit utilization ratio is high (90%), making you less attractive to credit bureaus and lenders.

Credit history (15%): Time is your friend here. The longer you have access to credit, the more positive it will impact your credit score. This makes it difficult for newcomers to get credit right away because they usually arrive in Canada without a credit history.

Credit mix (10%): Diversification makes a difference. You’ll notice a slightly higher credit score if you have a healthy mix of credit products. For example, a car loan, credit card, and line of credit instead of just credit cards.

Credit inquiries (10%): Do you find yourself applying for loans frequently? Whether you’re applying for credit cards, payday loans, or even mortgages, lenders must make “hard inquiries” about your credit to make their decision. The more hard inquiries there are, the more they negatively impact your credit score.

Keep in mind that everyone’s credit situation is different. If you have a strong payment history but an unfavorable credit utilization ratio, that may not mean your credit score won’t be high. Credit bureaus count all the details in your credit report before calculating the score. Likewise, lenders will usually review your entire report before making an approval decision.

Does overdraft affect your credit score?

Not usually. You shouldn’t see an impact on your credit score after an overdraft. However, if your account goes negative and you don’t repay your bank in a timely manner, your bank can report you to the credit bureau, which will lower your score.

Does checking your credit score lower it?

You won’t hurt your score by checking or requesting a credit report yourself (also known as a “soft inquiry”), but if a lender makes a hard inquiry when you apply for a credit card or loan, your score will drop significantly. Few points.

Some lenders make simple inquiries first so you can get an idea of ​​your loan terms and eligibility before allowing a hard pull.

How to get your credit score

You can Get your credit score Online, by mail, or in person. Of course, online is most convenient.

You can order your credit report and score directly from the two credit bureaus in Canada:

Some providers like Burwell or Credit Karma It allows you to check and report your score for free, whenever you want. Check with your bank to see if they offer a free credit score quote as well.

How to improve your credit score

If you recently requested your credit report and discovered that your credit score is bad, don’t panic. You can improve your credit score over time by following a few steps.

Here’s how:

Payment on time: Are you struggling with deadlines? Set reminders and put each bill in your Google Calendar if you have to. You can also automate bill payments with your bank to ensure your due dates are met. Payment history, specifically late payments, is the heaviest factor in your credit score. Correcting this problem is one of the best ways to fix bad credit.

Correcting credit bureau errors: We recommend checking your credit report at least once a year. If you notice any accounts or debts you don’t recognize, contact the credit bureau. The error could be simple human error or even a financial scam that negatively affects your credit score.

Get overdraft protection: Have you ever gone negative on your bank account? Unfortunately, banks can sometimes report this to the credit bureaus. Overdraft protection may cost you a few dollars a month, but if you’re at risk, it’s worth it to protect your credit score.

Create a budget: We know that life is expensive, and it’s easy to fall into spending more than you earn. One way to mitigate this is with a strong budget. Check out our free budget planner to stay organized.

Talk to someone: If you feel like you’re drowning in debt, improving your credit score may seem like an uphill battle. That’s why Credit Canada’s certified credit counselors are here to support Canadians like you with free debt advice.

Consider debt consolidation: There are options if you feel like your debts are out of control. Debt consolidation is a strategy for dealing with mounting debt.

Debt consolidation loans can simplify the repayment process by consolidating all of your debts into one loan and one payment each month. Debt consolidation programs involve a third party or agency to negotiate a lower debt amount, which often helps you save on interest fees.

How long does it take to improve credit?

The length of your credit improvement journey will vary depending on factors such as your debt load and overall credit history. Your current grades can also affect the process.

If you have a high score, it may take months to see small changes and break into the top level. If you have a lot of debt or negative indicators on your credit report, you’ll have to make on-time payments for about six months and reduce your credit utilization ratio to see meaningful improvements.

Increase your credit score as a newcomer

One challenge that newcomers to Canada may face is their lack of credit history. Starting a new life in Canada means leaving behind years or decades of positive credit history in your home country.

We recommend the following to build your credit as a newcomer.

1. Get a bank account. Open a checking or savings account with a bank or credit union.

2. Apply for an unsecured credit card. After a few months, you’ll build up some financial history with your bank, at which time you can apply for an unsecured credit card.

3. Start with a secured credit card. If you can’t access an unsecured credit card, start with a secured card, which requires a refundable security deposit, usually equal to your credit limit (for example, a $200 deposit with a $200 maximum).

4. Get an internet or cell phone plan. Start with an inexpensive package simply to build your credit score, as cell phone companies report payments to credit bureaus.

5. Apply to report your rent to the credit bureaus. Rent payments can be used to build your credit, but you must apply to report them. Use Burwell Rental advantage A tool to do this.

Learn more about building your credit from the ground up as a newcomer with our e-learning modules.

Pay off debt without hurting your credit score

If you find yourself facing a low score and a lot of debt, you’ll need to create a game plan.

List your debts from smallest to largest and note the interest rate for each account. You can attack the debt with the highest interest rate first (known as the Avalanche Method) or start with the account with the lowest balance (known as the Snowball Method) and build momentum. Either way, make sure you don’t start closing accounts, as that could hurt your score.

Learn how Pay off debt without hurting your credit score.

Improve your credit score with Credit Canada

Your credit score can have a profound impact on your ability to live your life. Whether you’re applying for a mortgage on your home or getting a line of credit, your credit score determines your ability and ease of borrowing.

If you need help improving your credit score, we can help. Credit Canada’s certified credit counselors support Canadians by phone, live chat, or using our digital assessment to get out of debt and get back to life. Contact us today at 1(800)267-2272!