Credit Score

If you’re thinking of taking out some credit – for example, in the form of a mortgage, auto loan, or a credit card – one of the key factors that determines what you’ll qualify for is your credit score. 

Your credit score is a measure of your financial health, and shows lenders their level of risk if they lend you money.

What is a credit score?

Your credit score is a number between 300 and 900. A credit score above 700 proves you manage your credit well, meaning a lender should feel comfortable letting you borrow money. A lower credit score shows that you have mismanaged your credit, making you more of a risk to the lender. This means you may qualify for a smaller loan amount, or require you to pay more for your loan – such as a higher mortgage rate. If your credit score is too low, or nonexistent, you may not qualify to take out debt at all.

Who assigns my credit score?

Your credit score is built and tracked based on information sent to credit-reporting agencies – more commonly known as credit bureaus – by companies that lend you money or issue you credit cards, such as banks, retailers, credit unions and other financial institutions. This information is used to generate a credit report, which details your activities over the last six years.

The types of credit you have, what your limits are, how much you owe on each account and whether you make payments on time is all taken into account on credit score.

In Canada, there are two credit-reporting agencies: Equifax Canada and TransUnion. Upon request, both agencies will send you one free copy of your credit report each year, as well as allow you to look up your credit score at any time for a small fee. It’s a good idea to check your credit report annually, to make sure there are no mistakes on it.

What is a good credit score?

Every lender has its own criteria for what constitutes a good score, so what range you fall under is more important than the exact point value. Here’s a general guide:

• 760+: Excellent—Congratulations, you’re considered the cream of the crop and will be offered the lowest interest rates and best terms on mortgages, loans and lines of credit. You’ll also qualify for credit cards with more attractive features, such as high-earning rewards. You have a long history of using credit responsibly, have a mix of different types of credit, consistently repay your debts on time and keep your account balances low.
  
• 725 to 759: Good—This score signifies to lenders that you generally make most of your payments on time, and your credit balances are relatively low compared to their limits. You’ll still qualify for good rates and products almost anywhere. The only thing holding you back may be that your balance-to-limit ratio is slightly too high.
  
• 660 to 724: Fair—You represent a default risk because you’ve hit a few financial speed bumps: late payments, too much debt or an account in collections. Creditors may give you a loan or bad credit mortgage, but will charge you higher interest rates and may require a deposit or collateral. You’ll need to do some work to improve your score.
  
• 560 to 659: Poor—A score in this range flags you as high risk, so you’ll experience great difficulty obtaining new credit. If you’re approved for a loan, you’ll have to pay exorbitant rates. Your score may be damaged by late payments to more than one lender, loan defaults or bankruptcy. If you fall into this category, consider talking to a credit counsellor.
  
• 300 to 559: Very poor—Scores in this range are rarely approved for anything. If your credit is this poor, you shouldn’t be applying anyway. Employers who check credit likely won’t hire you, and landlords will probably reject your application for rental housing. To repair your credit, you should focus on reducing your debts, paying off any accounts in collection, making payments on time and switching to a secured credit card to rebuild your credit profile. You should definitely seek the professional help of a credit counsellor.

It’s possible to have a credit score of zero if you’ve never opened any kind of credit account, or if all your accounts are closed or inactive and have fallen off your report after several years. If you have little or no credit history, getting approved can be difficult because lenders have no way to measure your level of credit risk.

How is a credit score calculated?

Credit bureaus keep their exact proprietary scoring models secret, but they generally follow this breakdown:

• Payment history (35%): This is the most important component of your credit score because it shows how you manage your finances and whether you pay your bills on time and in full. It includes any bankruptcies, foreclosures, wage garnishments, liens and delinquencies. The amount of time information stays on your file differs based on which province or territory you live in, but negative information generally remains on your file between six to seven years.
  
• Amount owed (30%): How much money you owe on your credit accounts and the number of accounts you have that carry balances. Carrying large balances, especially if those balances are close to your limit, can signal to creditors that you aren’t in control of your debt.
  
• Length of credit history (15%): This isn’t simply the number of years since you started using credit, but how long each of your credit accounts have been established, the ages of your oldest and newest accounts, the average age of all accounts and how recently each one was used.
  
• Types of credit (10%): It’s considered healthy to have a mix of three types of credit: revolving (accounts with a different payment each month depending on how much credit is utilized but doesn’t need to be paid in full, such as credit cards), instalment (accounts with fixed payments for a fixed period of time, such as mortgages and student loans) and open (a hybrid—the payment is not the same each month but does need to be paid in full, such as utility accounts)
  
• New credit (10%): The number of recent requests for new credit or newly opened accounts in proportion to older ones. When you apply for most types of credit, a “hard inquiry” (or “hard pull”) will appear on your credit report due to lenders requesting a copy. If you don’t have a long credit history, or apply for a lot of credit in a short amount of time, it can negatively affect your score. Requesting your own credit report counts as a “soft inquiry” and will not affect your score.

It’s important to note that one person has more than one credit score—a subscriber may report information to one agency but not the other, or may update one agency with your current information less frequently than the other. The agencies themselves also use different methodologies and software to calculate their scores. Because of this, you should check your score with both bureaus. Your respective scores, however, should fall within the same range—a significant discrepancy can indicate an error. 

Credit scores for new Canadians

Have you just moved to Canada? Often, newcomers to the country need to build their credit score from scratch, meaning they start off with a zero rating. This is because the way credit is regulated can differ between countries, and an existing score won’t be transferred to Canada when you arrive. 

This can present a challenging hurdle for newcomers to Canada trying to get established; credit is needed to access the basics in Canada including getting a car, or a credit card. It can also make it tough to find housing – even if you don’t plan on buying a property and taking out a mortgage, prospective landlords want to see that rental applicants have a history of making their payments on time.

However, starting fresh with your credit score can also be a good thing; if you’ve filed for bankruptcy or had a habit of making late payments in the past, you can leave those records in the past. However, there are some debts that will follow you when you move, and your lender could undertake legal action to reclaim their debt if necessary.

How to build your credit score from zero

If you’re new to Canada, are entering the workforce for the first time, or need to repair your credit, there are a few tried-and-true steps to follow to increase your credit score. It’s vital that you start to cultivate a history of paying off debt on a timely basis, so lenders know you can be trusted with additional credit products, and offer you more options in the future.

• Take out a secured credit card: A secured credit card is different from a traditional credit card; instead of having open-ended revolving credit, a secured credit card requires an up-front cash deposit to use as collateral. This collateral sets the spending limit for the card. Unlike a pre-paid credit card, however, a secured credit card will report your usage to Canada’s credit bureaus, helping you build both a payment history and credit score. Using a  secured credit card responsibly, such as always making payments on time, will help increase your credit score to the point where you can apply for a regular, unsecured credit card.
• Sign up for a mobile phone plan: Getting a cell phone, and entering a service contract, is actually a type of installment loan, which can help build your credit score as you pay it down. However, make sure you get a post-paid payment plan, which is reported to credit bureaus; pre-paid cell phone plans are not and won’t help your score.
• Take out a car loan: Car loans are another form of installment loan; even if you can’t afford a brand-new car, it’s possible to take out a loan from a lender for a used vehicle. Making your monthly car loan payments will also build up your credit score. Car dealerships can also offer these loans, but typically at a higher interest rate, and include more predatory loan terms – it’s important to read the fine print when signing up for one of these auto loan options.
• Open a bank account: Opening a chequing or savings account for your regular transactions helps build a relationship with a Canadian lender. However, be aware of the fees and other rules that apply to some bank accounts, and go with no-fee options if you’re looking to keep your banking costs down.
• Don’t apply for too much credit at once: Putting in applications for multiple credit products at the same time can be a red flag for lenders and credit bureaus, especially if you don’t have an existing history of paying off your debt. As well, each time you apply for a new product, the lender will make a “hard” check on your credit report, which can lower it by a few points. Having too many hard checks taken out on your report at once can be damaging to your credit score.
• Be patient: Keep in mind, it may take some time to grow your credit score, especially if you’re starting from absolute zero. Always making your payments on time, keeping your debt ratios low, and demonstrating responsibility with credit, will prove to lenders that you can be trusted with larger credit limits, and more credit product options.

How do I find out my credit score?

As noted above, it’s recommended that you check your credit report and score at least once a year. Both Equifax and TransUnion will mail you a free copy of your credit report when you order it via telephone or mail/fax in a request form with photocopies of two pieces of identification. However, the free report will not include your credit score. To find out your score, and to instantly access your credit report online, you’ll have to pay a fee. Equifax and TransUnion offer one-off access to your report and score and subscription services to monitor your credit.

Think of credit as a circle, not a line—it requires constant diligence. If you’ve established good credit, you need to be vigilant to keep it stable. If your score is dismal, you should be working methodically to rehabilitate it.

How to improve your credit score

Why do you need a good credit score?

When the credit score was first introduced, it was meant to help financial institutions make, “complex, high-volume decisions about creditworthiness”. Under that reason, it’s always been a piece of the puzzle in determining what interest rate borrowers can get, when applying for mortgages or other loans.

Today, however, it can be used in what seems like a dozen other circumstances, including when you’re applying for an apartment rental, an insurance policy and even a new cell phone contract. Some people even have to sign off on future employers running a credit check on them, before they can be hired.

Overall, credit scores are meant to prove one thing: how good or “trustworthy” you are with your finances. For this reason, you’ll want to build up and maintain a good credit score for as long as you’ll need access to credit, as the vast majority of people do.

How your credit score impacts your mortgage

Your credit score is important, because it affects which lender you can get your mortgage from and what your interest rate on that mortgage will be. Prime lenders, such as major banks, will definitely give you a mortgage if your credit score is above 700, and they will consider applications with credit scores between 600 and 700.

If your score is between 600 and 700, the rest of your application will need to be strong in order to get approved. The lower your score, the greater risk you pose to the lender. To compensate for that risk, some lenders, such as trust companies and private lenders, will charge you a higher interest rate. Some lenders won’t lend you money at all if your credit score is too low.

Here is a table showing which lenders you can get a mortgage from in different credit score range scenarios.

Read more- Newcomer mortgage options in Canada

How your credit score impacts your credit card applications

Credit cards are a key tool for building your Canadian credit profile; using one responsibly, and making your payments on time, signals to creditors that you can handle a revolving form of credit.

You’ll need a credit score of at least 660 to be issued a credit card from a lender. A credit card issuer may also look at other factors, such as employment, debt repayment history, and other debt ratios, when deciding to offer you a card.

The strength of your credit score may also determine the type of credit card you qualify for; if you have a lower credit score, you may be limited to a secured card, or other products designed to help you build your score. If you have a healthy credit score, you may qualify for cards that come with perks and rewards, such as travel or cash back credit cards.

Also read: How your credit card impacts your credit score

Learn more about how credit cards work:

• Types of Credit Cards
• Credit Card Interest Calculator
• How to curb spending and tackle credit card debt 

How your credit score affects your personal loans

Your credit history is an important factor when applying for products such as personal loans. It’s recommended that you have a score of at least 600 when applying for a personal loan; in addition to this, loan providers will also look at evidence of your employment, and income. In some cases, borrowers may also have to put down a form of collateral to get a personal loan, depending on whether it’s secured or unsecured.

Learn more about personal loans:

• • Personal loans vs. balance transfers
  • Personal loans vs. lines of credit
  • Personal loans for credit card debt

How your credit score affects your banking products

Typically, lenders will allow you to open a deposit account, such as a chequing or savings account, regardless of your credit score and history. Having these accounts open with a Canadian lender is also an important way to establish a history as a customer. It’s also a way to keep your liquid funds safe and accessible. Unlike using a credit card, however, your bank account use, such as using your debit card to access cash within your chequing account, won’t impact your credit score. However, growing your money in low-risk investment vehicles – such as Guaranteed Investment Certificates (GICs) – is reported to credit bureaus, and can help improve your credit score.

Learn more about Canadian banking products:

• What Is A Chequing Account?
• What is a Savings Account? Types, Fees, Taxes & More
• The best bank accounts for newcomers to Canada

How does your credit score impact your insurance?

There are some cases where your credit score may impact the premiums you pay for insurance coverage – but it depends on the product and where you live. In some provinces, auto insurers will use your credit score when determining the rate you’ll pay; however, this practice is banned outright in Ontario and Newfoundland and Labrador. Your consent may be required in other provinces for insurers to check your credit score; as with other financial products, a strong score can qualify you for lower premiums, while a poor score can lead to higher ones.

Learn more about insurance in Canada:

• What is tenant insurance?
• How tenant insurance helps landlords and tenants lower their risks
• A newcomer’s guide to buying a car in Canada
• How to get a driver’s license as a newcomer to Canada

References and notes

1. Two clients with the same credit score may not qualify with the same lenders. In addition to credit score, lenders will look at income, debt obligations and equity in property, as well as the property itself.
2. Mortgage rates listed are examples of 5-year fixed rates and may change at any time.