If you want to be accepted for credit, such as a loan, you must have a good credit score.

In this beginner’s guide to Canadian credit scores, you’ll learn how credit scores work, credit score ranges, how to check your score and how to improve it.

What is a credit score?

A credit score is a number between 300 and 900 given to you by a credit bureau which represents the likelihood of you paying credit back. Scores are calculated using information from your credit report.

You receive points when you use credit responsibly and lose points if you don’t. A high credit score gives you a better chance of borrowing money while also benefitting from the best rates.

How a credit score works

In Canada, existing lenders report information about your financial behaviour to the two major credit bureaus, Equifax and TransUnion, who update your credit report accordingly. This information in your credit report is used to calculate a three-digit number, which is your credit score.

You Credit score summary on myEquifax credit report dashboard

Your score is determined using factors such as your payment history, the amount of debt you owe and how long you’ve been using credit.

Your credit score in Canada can range between 300 and 900

Your credit score can range between 300 and 900. The higher the score, the more likely you will be accepted for:

  • Loans and credit cards
  • Mortgages
  • Car finance
  • Property rentals

Companies look at your credit score by running a credit check with a credit bureau. This allows them to quickly gauge how responsible you are when managing credit and determine the risk of lending money to you or accepting your application.

Even if you have a good score, some lenders may add additional criteria to decide whether to approve your application. The result may mean you are refused by one company but accepted by another, making things confusing when you have a good score.

If you want to understand why your application has been refused, you should contact the lender to determine how they evaluate eligibility.

A good credit score demonstrates that you are a responsible borrower who makes payments on time. A poor credit score indicates that you don’t make payments frequently and fail to manage credit accounts properly.

Poor credit makes it difficult for you to access credit or result in you paying more to borrow money. It could even affect your job prospects or your ability to rent a home.

What credit score is considered good?

According to Equifax, credit scores from 660 to 900 are generally considered good, very good, or excellent.

Here’s a breakdown of credit scores and how lenders view them:

Poor: 300-559

It will be challenging to get credit such as a loan or credit card, and you must improve your score to improve your chances of success.

Fair: 560-659

You might be accepted for credit, but you won’t be offered the best products, and you’ll have higher interest rates.

Good: 660-724

Your score is stable, but you can still improve your score further. You’ll get decent interest rates, but your credit limits may be lower.

Very good: 725-759

Your credit score is healthy, and you should be eligible for most prime credit products and traditional mortgages.

Excellent: 760-900

You should be able to access the best credit cards, loans and mortgages at higher credit limits with the best interest rates.

See also: Credit score ranges in Canada

The difference between Equifax and TransUnion

If you live in Canada, you have two marginally different credit scores depending on whether you use Equifax or TransUnion to check your score. Each credit bureau uses a slightly different calculation to calculate your score, so this is nothing to worry about.

Difference between the credit bureaus in Canada: Equifax and TransUnion

Who can access my credit score?

Your credit score can be accessed by various organizations such as:

Banks • Credit unions • Financial institutions • Credit card companies • Finance companies • Retailers • Utility companies • Insurance companies • Mortgage companies • Government agencies • Collection agencies • Employers • Landlords

What affects a credit score?

Your credit score is affected by your decisions relating to your finances, such as how much money you owe and whether you make payments on time.

Credit scores can be affected by many factors:

Credit score Possible reasons
Poor: 300-559
  • A new credit score.
  • Defaulted or closed accounts.
  • Debts sent to collection agencies.
  • Making payments through a formal solution such as a consumer proposal or bankruptcy.
Fair: 560-659
  • Multiple missed or late payments.
  • Carrying large balances.
Good: 660-724
  • Some missed or late payments.
  • High credit utilization ratio (high balances).
  • Errors on your credit report.
  • Too many lenders.
Very good: 725-759
  • Making most payments on time.
  • Low credit utilization ratio (low balances).
  • Not using enough credit.
Excellent: 760-900
  • Making multiple payments on time each month.
  • Low credit utilization ratio (low balances).

How do credit scores go up?

Your score improves when you make positive decisions, such as making payments on time and reducing your balances. Learn how to increase your credit score.

How do credit scores go down?

If you make late payments or miss them altogether, this lowers your credit score. Be sure to keep within the credit agreement’s terms to ensure your credit score doesn’t go down.

Things that damage a credit score

A credit score is calculated using a variety of factors relating to your credit history and payment behaviour.

What damages a credit score?

Your credit score decreases if you have negative information on your credit report like:

  • Late payments.
  • Missed payments.
  • Defaulted or closed accounts.
  • Court decisions relating to your credit, such as a lien on your house.
  • Too many (or not enough) lenders.
  • High balances (if you owe more than 30% of your available credit).
  • Your total outstanding debt.
  • Too many credit applications.
  • Poor credit history (your track record for repaying credit).
  • Debts sent to a collection agency.
  • Insolvency or bankruptcy.

Other factors that can affect your score include:

  • How long your accounts have been open.
  • The different types of credit you use.

Your credit score is not the only factor considered.

Lenders also take into account whether you can afford credit due to your income (debt-to-income ratio), expenses and employment. You may also be refused credit if there is missing information in your application.

How debt solutions affect your credit score

Making payments through a consolidation order, orderly payment of debts, consumer proposal, debt management program, or a credit counselling agency negatively affects your credit score, but this will improve in time once you are out of debt.

You must rebuild your credit after bankruptcy because it damages your credit score. However, so does owing money to your creditors.

In short: prioritize repaying your debts to help rebuild your credit score.

Why a credit score is important

Your credit score is important because it impacts your chances of getting credit such as loans, credit cards and mortgages.

A good credit score unlocks loans, credit cards and mortgages at the best rates.

A low credit score indicates to lenders that you cannot manage money sensibly. This means you are a high-risk borrower and can result in you being refused credit. Even if you are accepted, you pay higher interest rates if you have a poor score, and you may need to offer collateral as security.

In some industries, such as the financial sector, your credit history can even affect your job prospects if an employer performs a credit check.

Landlords also look at your credit history to determine if you can pay your rent on time.

You’ll find that having a good credit score makes achieving your financial goals easier because lenders trust you to repay them on time.

It’s simple: having a good credit score unlocks the best credit products at the best rates, allowing you to achieve your financial goals at a lower cost.

How often is a credit score updated?

Your credit score is typically updated at least once every 30 days. This changes when lenders report new information such as balances and payment activity to the two main credit bureaus — Equifax and TransUnion.

Depending on how many lenders you have, the reporting frequency varies, and they might report this information at different times throughout the month.

How a credit score is calculated

Your credit score is calculated from:

  • Your payment history: 35%
  • Your credit utilization ratio (used credit vs. available credit): 30%
  • The length of your credit history: 15%
  • Public records: 10%
  • The number of inquiries into your credit file: 10%
How your credit score is calculated

Source: Equifax Canada: How Are Credit Scores Calculated?

Be mindful that other factors alongside your credit score determine your creditworthiness, such as your income and employment status.

Here’s a tip: because there are two major credit bureaus in Canada, your credit score may vary slightly depending on the scoring model used by the credit bureau.

Credit score factors

Let’s look at the factors that make up your credit score to understand them more clearly:

What is payment history?

Payment history is the most important factor, accounting for 35% of your total credit score calculation.

Making payments to your credit accounts on time is crucial. You must demonstrate to prospective lenders that you can borrow money and pay it back as agreed.

If you miss a payment or make a late payment towards a credit account, it’s reported from the lender to the credit bureau through a series of codes. This happens when the bill is over 30 days old.

These are called credit ratings, and every account has a credit rating:

  • 0: Too new to rate or not yet used.
  • 1: Paid within 30 days of billing or paid as agreed.
  • 2: Late payment: 31 to 59 days late.
  • 3: Late payment: 60 to 89 days late.
  • 4: Late payment: 90 to 119 days late
  • 5: Late payment: more than 120 days late.
  • 6: Code not used.
  • 7: Making payments through a consolidation order, orderly payment of debts, consumer proposal, debt management program or a credit counselling agency.
  • 8: Repossession.
  • 9: Written off as a bad debt, sent to a collection agency or included in bankruptcy.

For example, if you pay your credit card bill within 30 days, it’s reported as an R1, the best possible rating. If you don’t pay your bill and it is over 30 days late, it’s reported as an R2.

Not making payments on time results in a higher number code, which damages your credit. This negative information appears on your credit report for six years from the date reported.

Consequently, this results in a lower credit score. It takes a period of consistent payments to rectify the damage and improve your score.

You receive an R1 credit rating if you pay your account within 30 days.

Payment history is recorded for all types of credit, even smaller accounts such as utility bills.

How to improve your payment history

So how do you improve payment history? It’s simple, pay your bills on time consistently.

Many people schedule automatic bill payments from their bank account every month. This avoids having to make the payment manually. Ensure that there is money to cover the payments, or you could be charged for a failed payment.

Aim to pay balances on credit accounts a few days before your statement is generated.

If you make payments on time, positive credit ratings are recorded on your credit report, which helps your credit score.

What is credit utilization?

Your credit utilization ratio measures how much available credit you are using from your available limits. You can calculate your percentage by dividing your used credit by the total amount you have available. Keeping a low debt utilization ratio improves your credit score.

Keeping a low credit utilization ratio improves your credit score.

Credit utilization is the second most important factor when determining your credit score, accounting for 30% of your total credit score calculation.

For example, if you two credit cards with a combined $3,000 limit, and you have used $1,500 on your cards, your total credit utilization is 50%.

What credit utilization is best for my credit score?

Keep your credit utilization ratio as low as possible, ideally less than 30% of your available credit.

Low credit utilization demonstrates to lenders that you’re responsible by using your available credit sparingly.

What happens if my credit utilization is too high?

High credit utilization damages your credit score, but your credit score increases again if you reduce your balances.

How to improve your credit utilization ratio

There are several ways to improve your credit utilization ratio.

If you are near your limit on one line of credit, spreading your balances over multiple lines of credit may allow you to reduce your balance to a reasonable level.

When paying your credit cards, make more than the minimum monthly payment or make multiple payments each month to lower your balances, thus improving your credit utilization.

Another option is to increase your available credit limits, which will lower your credit utilization ratio.

Even if you are not using them, it’s worth keeping credit accounts that have zero balances, as this helps your credit utilization.

What is credit history?

Credit history is a historical record of your credit accounts combined. Creditors like to see that you’ve been able to manage these accounts over their lifetime, so they turn to your credit report to look at this information. If you have a good credit history, you are more likely to be accepted for credit.

Lenders want to see you manage credit accounts successfully for at least two years.

The length of your credit history is the third most important factor when determining your credit score, making up 15% of your total credit score calculation.

You should also pay attention to the average account age. When this is high, lenders see this as an indicator of stability.

If you have any old credit accounts, it’s usually best to keep these open to maintain a higher average account age. Likewise, opening too many new accounts will lower your average age and may have a detrimental impact on your credit score.

Why the length of your credit history is important

A good credit history demonstrates to lenders that you can manage credit accounts over a long period. Having good credit means you are likely to be accepted for credit at a lower rate, saving you a lot of money over time. Having a poor or limited credit history makes you more likely to be refused credit.

How much credit history is needed to buy a house?

Your credit history is a crucial factor if you want to be approved for a mortgage. Mortgage lenders will use your credit history to ensure that you have managed at least two lines of credit successfully for at least two years.

How many years of credit history is good?

Aim to have a long credit history — lots of credit accounts paid on time.

A credit score is generated once you have six months of credit activity. Some lenders want to look at your credit history and see that you have managed multiple credit accounts successfully for at least two years.

Each lender has different criteria, so the longer, the better.

How to improve your credit history

You can’t change your credit history quickly. You must pay your bills on time over many years to increase the age of your credit history.

Steps to improve your credit history:

  • Establish a good credit history over many years.
  • Add new credit products and maintain a good track record with the lender.
  • Add different types of credit.
  • Consider a secured loan or secured credit card.
  • Keep your credit utilization ratio below 30%.
  • Only borrow what you can afford.
  • Don’t make too many applications at once.
  • Keep the oldest credit account open to lengthen your credit history.

Credit mix

Having a mix of credit products rather than just one type of credit is a better indicator that you a responsible borrower.

Having a healthy mix of credit can positively impact your credit.

Some examples of credit products include:

  • Car loans
  • Credit cards
  • Lines of credit (LOC)
  • Installment loans
  • Mortgages
  • Student loans
  • Utilities such as a cell phone plan.

For example, if you can open and manage a credit card, loan and mortgage, it indicates that you can manage different types of credit.

Different types of credit

There are different types of credit accounts: revolving, installment, open and mortgage.

Installment credit involves making fixed payments over a set term. Examples include mortgages, car loans, student loans and personal loans. These types of credit are easy to manage because you are making set payments every month.

Revolving credit describes products that can be reused as long as the account is open and payments are made on time. Examples include credit cards, home equity lines of credit (HELOC) and some other lines of credit.

The cost varies depending on how much you owe, and there is usually interest charged each month. Be mindful that if you only pay the minimum amount, the balance can increase quickly, making it harder to reduce the balance.

Open credit refers to accounts that you can borrow from up to a certain limit but must be paid every month. For example, a mobile phone account falls under this credit type.

Mortgages are also a type of credit that appears separately on your credit report.

By using a variety of revolving, installment and open credit products responsibly, you can establish a positive credit history and improve your credit score.

If you are interested in improving your credit mix, it’s worth talking to your financial institution about whether they offer tailored credit building products that can add some variety to your credit mix.

What is a good mix of credit accounts?

There is no perfect mix of credit accounts, but having a combination of installment credit and revolving credit can be beneficial.

For example, having a credit card (revolving credit) and a loan (installment credit) is better than just having credit cards.

Don’t open too many new accounts within a short period, or lenders will see this as a sign of financial distress.

Avoid payday loans: they don’t positively impact your credit history but can damage it if you default, at which point they are passed to a debt collection agency.

Lenders will typically see you as a lower risk if you have a mixture of credit with a history of on-time payments.

What are public records on a credit report?

Public records are pieces of financial information that appear on your credit report that are also on file with the government. This information is accessible to the general public.

myEquifax Canada: Public Records

Public records appear on your credit report if you file for bankruptcy, enter into a consumer proposal, are subject to court proceedings or if there is a lien on your property.

The public records section on your credit report makes up 10% of your credit score.

If a public record appears on your credit report and it’s a mistake, you can raise a dispute with the credit bureau to have it removed.

Do formal debt solutions appear as a public record on my credit report?

If you file for bankruptcy or enter into a consumer proposal, both will appear as a public record on your credit report.

A note appears on your credit report’s public records section mentioning your bankruptcy or consumer proposal and the date it was filed.

The good news is public records eventually fall off your credit report.

See also:

What are credit inquiries?

If a company requests a copy of your credit report, a record of this event is added to the inquiries section in your credit report. Inquiries make up 10% of your total credit score calculation.

myEquifax Canada: Inquiries

There are two types of inquiries:

Hard inquiry

A hard inquiry is when a lender requests your credit report. It remains on your credit report for three years and anyone who looks at your credit report will see it. A hard inquiry can negatively affect your credit score.

Multiple hard inquiries in a short space of time cause alarm to lenders, so space out credit applications.

Soft inquiry

Soft inquiries, such as checking your own credit report, do not affect your credit score. Only you can see these types of inquiries.

Frequently asked questions about credit scores

What does a credit score mean?

A credit score is a three-digit number calculated using information from your credit report. Lenders decide whether to accept your application for credit by using your credit score to predict how likely they are to get their money back. A good credit score means you can access the best credit products at low interest rates.

What is the highest credit score in Canada?

Credit scores in Canada range between 300 to 900. The highest possible score is 900. A score between 760 and 900 is considered excellent. A score above 725 is a very good score and you should be eligible for most prime credit products and traditional mortgages.

Does the amount of debt affect my credit score?

If you have lots of debt, it can damage your credit score, which lowers your chances of being accepted for new credit such as credit cards, loans and mortgages. This is called your credit utilization ratio, which compares how much credit you are using from the total available to you. Ideally, you want to use no more than 30% of your available credit.

Why credit scores drop

Your credit score can drop for many reasons, but late or missed payments are the most damaging. If you miss a credit card payment, this is reported to the credit bureaus, which negatively affects your score.

You’ll also find that your credit score will decrease if you have too many lenders, you’re using a lot of credit, or you’re making multiple credit applications in a short space of time.

Check your credit report regularly to make sure your information is accurate. Mistakes can cause your score to drop, resulting in you paying higher interest rates or being refused credit completely.

Can a credit score drop for no reason?

Your credit score drops when something in your credit report is added or changed, such as:

  • late or missed payments
  • how much credit you are using
  • a change in your credit history (such as a closed account)
  • the type of credit you have
  • an application for new credit.

Credit score vs credit rating: what’s the difference?

A credit rating is a letter and number code applied to each credit account you have. The letter refers to the type of credit, while the number indicates whether your account activity is good (1) or bad (2-9).

Your credit score is a three-digit number between 300 and 900, giving your entire credit report an overall score. Credit ratings affect your credit score.

Negative activity on a credit account will result in a higher number code on your credit rating, which lowers your credit score. Positive activity will increase your score.

If you pay your credit card bill on time, it will be reported as the best credit rating: R1. If you pay your credit card bill over 30 days late, it will be reported as an R2. If the debt is referred to a collection agency, it’ll be reported as the worst possible credit rating: R9.

See also: What is a credit rating?

Credit score vs credit report: what’s the difference?

A credit report is a detailed list of your credit history over time, including a list of your accounts, payment history and inquiries. A credit score is a number that is calculated from the information in your credit report, allowing lenders to determine your creditworthiness.

Can a credit score affect employment?

In some sectors like finance and insurance, an employer can perform a credit check before making a formal offer of employment, but they must have your consent before doing so.

How to borrow money without affecting credit score

It’s essential to check your credit report before you consider borrowing money. Knowing your credit score allows you to understand what credit you may be eligible for. Scores from 660 to 900 are more likely to be accepted.

Tips when borrowing money without damaging your credit:

  • Some credit cards let you check for pre-approval using a soft pull or “soft hit”. A soft pull doesn’t affect your score.
  • Approach your financial institution directly to ask about products that may suit your credit profile.
  • Some credit unions offer loans to members without a credit check.
  • Be aware that income, employment status and debt-to-income ratio may be used.
  • Improve your chances by building up a solid credit history before you apply.

Can I get a loan without a credit check?

In Canada, alternative lenders offer loans without a credit check. Typically, these loans have high interest rates and must be paid back quickly, which can cause financial difficulties. Factors such as income, debt-to-income ratio and employment status are used instead of your credit score.

These lenders often ask for proof of income, and they may request collateral or a guarantor to secure the loan.

Examples of loans without a credit check include payday loans, personal installment loans, title loans and guarantor loans.

Payday loans should always be avoided. Due to the high-interest rates, these types of loans usually make things worse and can suck you into a vicious cycle of borrowing.

Bottom line: Don’t use payday loans.

Does an inquiry made by an insurance company affect my credit score?

No, insurance companies make soft inquiries as these inquiries are not related to your credit.

How do accounts in collections affect my credit score?

Unfortunately, if an account is referred to a collection agency, it’s given the worst possible credit rating.

Accounts in collections severely affect your credit score and remain on your credit report for at least six years from the date of your last payment.

See also: Dealing with debt collectors

Are credit scores public information?

There’s no record of your credit score available publicly. It won’t appear to anyone but you, and you must request access by verifying your identity.

Should I check my credit score?

Because your credit score is updated on a monthly basis, it makes sense to check it once a month to determine if there has been an improvement or a decline in your score.

A 2020 survey conducted by Equifax Canada found that Canadians are checking their credit reports and scores more frequently and are taking identity theft more seriously when compared to previous years.

  • Within the last 12 months, 71% of survey respondents have checked their credit report, including 57% in the last month.
  • 54% said they check their credit score at least annually compared to 48% a year ago.
  • Younger adults aged 18-34 are significantly more likely to check their score monthly than those over 35 (37% in 2020 vs. 27% in 2019).
  • Younger adults (under 55) were significantly more likely to have checked their credit reports regularly.

Check your credit report and credit score regularly to ensure you understand your finances better and learn how to improve your financial wellness.

See also: Improve your credit score

Conclusion

Your credit score represents the likelihood of you paying credit back. It goes up when you use credit responsibly and goes down if you don’t.

If you are planning a major purchase, such as a car or mortgage, knowing your credit score can help you gain access to lower interest rates and flexible terms. Regardless, having a good score opens the door to a wide variety of attractive credit products.

What next? Once you’ve checked your credit score, learn what you can do to improve it.

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