We all know the importance of that mysterious little number called a credit score. It holds the power to grant you things like mortgages and lines of credit, and it can even make renting a place to live easier (or harder). It also has the power to produce anxiety, stress, and worry. This is mostly because so many of us don’t know what a good credit score is, how it’s calculated, or concrete steps you can take to improve it. If this sounds like you, read on for a quick primer on everything you need to know about what makes a good credit score in Canada.
One of the most frustrating things about credit scores in Canada is that there isn’t a standard scoring system for each person. Equifax and TransUnion are the two main bureaus in Canada and they each have their own proprietary methods of scoring credit files.
Further, the bureaus aren’t working with the exact same information. Some lenders only report payment data to one of the bureaus and most lenders will do credit inquiries with only one bureau.
For example, if you applied for financing at one of the major banks, they may only check your TransUnion file, so the inquiry will be listed on your TransUnion file and not your Equifax file and, as you’ll see below, inquiries are one of the factors that impact your credit.
To make things even more complex, each of the bureaus may have a number of different types of scores that they supply to banks and lenders - so your TransUnion score from one lender could be different from your TransUnion score at another lender. The end result is one person could have a handful of different scores from both credit bureaus.
So knowing all this, how can you ensure you maintain a good (or great) credit score with all models and bureaus? Let’s start by exploring the credit score ranges.
In Canada, credit scores range from 300 to 900. Where your number falls in this range will determine whether or not you qualify for certain loans, as well as the interest rates you’re offered.
According to the credit bureau Equifax, credit scores over 670 are generally considered to be good and credit scores over 800 are excellent. Anything in the 300 to 579 range is usually considered poor.
Typically, if you have a high score you can expect to qualify for low interest rates. Conversely, if you have a poor credit score you’ll likely struggle to qualify for new loans at all.
These are broad guidelines, however, and there’s no consensus on the precise line between poor and good, or good and excellent. Even still, these ranges give you a decent idea of your credit score’s overall standing.
TransUnion and Equifax follow roughly the same formula when they calculate credit scores. The number you receive is based on a blend of your financial information, including things like how often you pay your bills on time.
There are five main factors that credit bureaus use to determine your credit score.
How often you pay your bills on time is the single most important factor that goes into your credit score calculation. It’s also the one you theoretically have the most control over. A history of late payments will damage your credit score.
Your existing debts are also a hugely important factor in your credit score. In particular, your credit utilization ratio (how much credit you’ve used vs. how much you have available) is a factor. A high ratio will damage your credit score.
The length of time you’ve been using credit is another factor. If you have no credit history or a very short one, this will lower your credit score, as lenders have less information to measure your creditworthiness.
Any time a hard check is run on your credit score, this shows up on your credit report. This is especially true if you have a high number of hard inquiries in a short period of time. You’ll learn more about inquiries below.
A history of bad credit or financial hardship will also negatively impact your credit score. For instance, if you previously filed for bankruptcy or had several debts go to collections. The good news is this typically only accounts for around 10% of your credit score calculation.
There are steps you can take immediately to begin repairing your credit and improve your credit score. It might not happen overnight but if you follow some of these tips your credit score will start to improve.
If you want to improve your credit the single most important thing you must do is ensure you pay every single bill you have on time and in full. No exceptions. Every late or missed payment, no matter how small, negatively impacts your credit score. Conversely, every bill paid on time and in full improves your credit score. This doesn’t mean one on-time payment offsets one late payment either. Creditors want to see a long pattern of bills paid on time, in full.
Credit utilization is a key factor in determining your credit score. It gauges your ability to manage credit by dividing the sum of your outstanding credit card balances by the sum of your available credit. For example, if you have two credit cards with a $5000 limit on each card and a balance of $2,500 on each card, your credit utilization is 50%. If you’re constantly maxing out your cards, your credit utilization is 100%, and that’s not good. It’s important that you keep your credit card balances low (preferably under 30%). It means paying off more than your minimum payment every month or, if possible, paying it all off.
Anytime you apply for new credit, lenders will ask your permission to see your credit report to check your eligibility. This is called a hard inquiry. Too many hard inquiries in a short period of time can reflect poorly on your credit report because it can indicate financial hardship. Therefore, it’s wise to only apply for loan products that are most essential and beneficial to your personal finances. For more information on hard and soft inquiries, check out this article.
A healthy combination of instalment and revolving credit indicates sound money management. Institutions have more confidence lending to borrowers who prove they can maintain a diverse mix of credit (car loan, personal loans, mortgage, credit cards, etc.) This is why experts will tell you not to cancel unused credit cards as it not only affects your credit history but could diminish a well-balanced credit mix too.
If you don't know your credit score, the first step to good credit is checking your credit score. Fortunately, you can do that online in a couple of minutes!
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