How is Your Credit Score Calculated in Canada?
By Arthur Dubois | 20 Jul 2023 |
Your credit score is a three-digit number that plays a major role in your financial life. It determines your creditworthiness and affects your ability to secure loans, credit cards, and even rent an apartment. In Canada, credit scores are calculated in a specific way to provide a fair assessment of your creditworthiness. But not all credit scores are calculated the same way. In this article, we will explore the factors that influence your credit score and how you can check your credit score in Canada.
Understanding Credit Scores
Understanding your credit score in Canada is crucial for your financial well-being. It provides insight into your creditworthiness and affects your ability to secure loans, mortgages, and credit cards. By knowing your credit score, you can make informed decisions about borrowing and managing your finances responsibly. With that being said, let’s delve into what a credit score is.
What is a Credit Score?
A credit score in Canada is a numerical representation of an individual’s creditworthiness and is used by lenders to assess the risk of lending money. It plays a crucial role in determining whether someone qualifies for a loan, credit card, or mortgage, and can also influence the interest rate and terms offered. Credit scores in Canada typically range from 300 to 900, with higher scores indicating better creditworthiness.
However, it’s important to note that not all credit scores are calculated in the same way. In Canada, there is a distinction between the FICO score and the credit score provided by credit bureaus and third-party agencies. Let’s take a closer look at the FICO score and how a good or bad credit score can affect your quality of life.
What is a FICO Score?
The FICO Score, also known as the Beacon Score, is a three-digit credit score that assesses the creditworthiness of individuals and determines whether their credit is considered good or bad. The FICO scoring methodology, which was developed by US-based Fair Isaac & Company (FICO), is licensed to Equifax and TransUnion in Canada.
It’s important to note that FICO does not directly collect credit information on Canadians, and that Canadians do not have consumer access to FICO credit scores. FICO scores are only shown to lenders when they perform a hard credit check on someone with one of the major credit bureaus like Equifax and TransUnion.
An investigation conducted by the Canadian Broadcast Corporation (CBC) discovered that credit score websites provide significantly different results. While Equifax and TransUnion provide FICO scores to their commercial clients, they do not provide FICO scores to individuals. Instead, individuals receive a credit score that is generated by the in-house calculation models of Equifax and TransUnion, and the same is true for credit score websites such as Borrowell and ClearScore.
Furthermore, Equifax and TransUnion do not have the same data on consumers, since it is not a given that all lenders report their data to both Equifax and TransUnion. As a result, the credit score that they generate with the FICO model and their own in-house model will be different for both providers. Meaning that the FICO score generated by Equifax is not the same as the FICO score generated by TransUnion. The inquiry by CBC further revealed that 90 percent of Canadian lenders, including major banks, rely directly on the FICO score for assessing creditworthiness instead of the in-house scores of Equifax and TransUnion.
Importance of a Good Credit Score
A good credit score is essential for a variety of reasons. Firstly, it increases your chances of securing favorable interest rates on loans and credit cards. Lenders are more likely to offer lower interest rates to individuals with higher credit scores, as they are considered less risky borrowers.
Having a good credit score also allows you to access higher credit limits, providing you with more financial freedom. With a higher credit limit, you can make larger purchases or have a safety net for emergencies. Additionally, a higher credit limit can improve your credit utilization ratio, further boosting your credit score.
Furthermore, your credit score can impact your ability to rent an apartment. Landlords often check credit scores as part of the tenant screening process. A better credit score can increase your chances of securing a lease, as it demonstrates your financial responsibility and ability to meet rental obligations.
Understanding credit scores and maintaining a good credit score is crucial for your financial well-being. By managing your debts responsibly, making timely payments, and keeping your credit utilization low, you can improve your credit score and open doors to better financial opportunities.
Drawbacks of a Bad Credit Score
A bad credit score, on the other hand, can have significant drawbacks, affecting not only your financial situation but also various aspects of your life. Negative information that contributes to a poor credit score remains on your credit report for up to seven years, prolonging the repercussions. In Canada, a credit score below 599 is considered bad, placing individuals at a disadvantage and labeling them as financial liabilities in the eyes of banks, lenders, and landlords.
One of the major drawbacks of having a bad credit score is limited access to necessary financial products and services. Acquiring a mortgage, personal loan, credit card, or other forms of financing becomes significantly more challenging. Even if approved for a loan, individuals with bad credit face higher interest rates, making borrowing more expensive and increasing monthly payments, ultimately straining their budgets and hampering savings.
Beyond financial implications, a bad credit score can also impact an individual’s quality of life. Renting a home or apartment becomes challenging as many landlords consider credit scores during the application process, often rejecting applicants with bad scores. Moreover, some employers, particularly in financial and sensitive information handling positions, check credit scores during the hiring process, using them as a measure of character and responsibility. Insurance companies in certain provinces may also utilize credit scores to assess risk and calculate higher premiums, making it difficult to afford necessary coverage.
Ways to Improve Your Credit Score
If you’re looking to improve your credit score in Canada, there are several strategies you can employ. Here are ten tips on how to raise your credit score in Canada:
- Pay your bills early: Set up automatic payments or use bill tracking apps to ensure timely payments and prevent your credit score from decreasing.
- Keep unused credit cards open: Maintaining old or unused credit accounts helps lengthen your credit history, which is valued by credit scoring models. Use them occasionally to avoid account closure due to inactivity.
- Avoid maxing out your credit cards: Aim to keep your credit utilization ratio below 30% by spending less than your credit limit. Pay more than the minimum amount and strive to pay off your balances in full each month.
- Review your credit report regularly: Check your credit score and report for errors, late payment records, duplicate accounts, or identity theft issues. Services like Borrowell and ClearScore offer free credit score checks.
- Dispute inaccuracies on your credit reports: If you find mistakes, inform the credit reporting agencies and provide comprehensive details. Document your interactions and start the dispute process promptly.
- Pay your debts in full: Create a payment plan and consider strategies like the snowball or avalanche method to pay off debts. Avoid bad debts that could lower your score and remain on your report for up to 7 years.
- Limit new credit applications: Only apply for credit when necessary, as frequent applications can be seen as a sign of financial difficulty. They can result in hard credit checks and decrease your score temporarily.
- Use a mix of credit accounts: Having different types of credit shows your ability to handle various financial obligations. Aim for a diverse credit mix, but avoid unnecessary applications that impact your score.
- Increase your credit limit: Ask your credit card company or lender for a credit limit increase, but be cautious not to overspend. This can improve your credit utilization ratio and positively impact your score.
- Consider credit cards to rebuild your credit: If you’re building credit, a secured or prepaid credit card is a fast way to raise your score. You make an upfront payment, which becomes your credit limit.
By following these tips, you can gradually raise your credit score in Canada. Remember, improving your credit score takes time and discipline, but the effort is worthwhile for your financial well-being.
The Credit Reporting Agencies in Canada
Canada has two main credit reporting agencies, Equifax Canada and TransUnion Canada, that play a vital role in the financial landscape of the country. These agencies collect and maintain credit information on millions of individuals and businesses, providing lenders with valuable insights into the creditworthiness of potential borrowers.
Equifax Canada
Equifax Canada is one of the leading credit reporting agencies in the country. With a vast database of credit information, Equifax plays a crucial role in the credit decision-making process for lenders across Canada. Whenever you apply for credit, whether it’s a credit card, a loan, or a mortgage, the lender may consult Equifax to assess your creditworthiness.
Equifax collects various types of information, including personal details, credit accounts, payment history, and public records such as bankruptcies or court judgments. This comprehensive credit report helps lenders evaluate the risk associated with extending credit to an individual or business.
It is highly recommended to review your Equifax credit report regularly to ensure its accuracy. Mistakes or discrepancies in your credit report can have a significant impact on your financial well-being. By monitoring your credit report, you can identify any errors and take the necessary steps to address them promptly.
TransUnion Canada
TransUnion Canada is another major credit reporting agency that operates in the country. Similar to Equifax, TransUnion collects and maintains credit information on individuals and businesses, providing lenders with valuable insights into their creditworthiness.
TransUnion’s credit report includes details such as personal information, credit accounts, payment history, and public records. Lenders use this information to assess the creditworthiness of borrowers and make informed decisions about extending credit.
Just like with Equifax, it is crucial to monitor your TransUnion credit report regularly. By doing so, you can ensure the accuracy of the information and address any errors that could potentially harm your credit score. Timely identification and resolution of discrepancies in your credit report can help maintain a healthy credit profile.
Both Equifax and TransUnion play a vital role in the credit ecosystem of Canada. Their comprehensive credit reports provide lenders with the necessary information to make informed decisions, while individuals can benefit from monitoring their credit reports to ensure accuracy and address any issues promptly.
Factors that Influence Your Credit Score
Understanding the factors that influence your credit score is essential for maintaining a healthy financial profile. Your credit score plays a significant role in determining your eligibility for loans, credit cards, and other financial opportunities. Let’s take a closer look at the key factors that contribute to your credit score.
Secured credit card
Payment History
One of the most crucial factors in calculating your credit score is your payment history. Lenders want to see that you are responsible and reliable when it comes to making payments. Late payments, defaults, and collections can have a detrimental impact on your credit score. On the other hand, paying your bills on time and in full demonstrates responsible financial behavior and positively contributes to your credit profile.
It is important to note that even a single late payment can have a negative effect on your credit score. Therefore, it is crucial to prioritize timely payments and ensure that you meet all your financial obligations promptly.
Credit Utilization Ratio
Your credit utilization ratio refers to the amount of credit you are using compared to your total available credit. This ratio plays a significant role in determining your credit score. A lower credit utilization ratio indicates responsible credit management and positively impacts your credit score.
It is advisable to keep your credit utilization ratio below 30% to maintain a good credit score. This means that if you have a credit limit of $10,000, it is best to keep your outstanding balance below $3,000. By keeping your credit utilization ratio low, you demonstrate to lenders that you are not overly reliant on credit and can manage your finances effectively.
Length of Credit History
The length of your credit history is another crucial factor in calculating your credit score. A longer credit history provides lenders with more information to assess your creditworthiness. It allows them to see how you have managed your debts and financial responsibilities over time.
It is beneficial to keep old credit accounts open, even if you do not actively use them, as they contribute to the length of your credit history. Closing old accounts can shorten your credit history and potentially have a negative impact on your credit score. Therefore, it is generally advisable to keep those accounts open and maintain a positive credit history.
Types of Credit
The variety of credit accounts you have, also known as your credit mix, also influences your credit score. Lenders want to see that you can handle different types of credit responsibly. Having a mix of credit types, such as credit cards, loans, and mortgages, demonstrates your ability to manage various financial obligations.
However, it is important to manage all credit accounts wisely and avoid taking on unnecessary debt. Having too many credit accounts or excessively relying on one type of credit can be viewed as a red flag by lenders. It is essential to strike a balance and use credit responsibly to maintain a healthy credit score.
Credit Checks
When you apply for new credit, the lender may perform a hard credit check, which can slightly lower your credit score. Multiple checks within a short period suggest an increased credit risk. It is advisable to limit the number of credit applications you make within a short timeframe to mitigate the impact on your credit score.
It is important to note that checking your own credit score or having a lender perform a soft credit check does not have a negative impact on your credit score. These types of checks are considered routine and do not raise concerns about your creditworthiness.
By understanding and actively managing these key factors, you can take control of your credit score and work towards building a solid financial foundation. Remember, a good credit score opens doors to better financial opportunities and can significantly impact your overall financial well-being.
How Credit Agencies Calculate Your Credit Score
Credit bureaus in Canada employ various methods to determine an individual’s credit score. These methods include analyzing payment history, credit utilization, length of credit history, types of credit used, and recent credit checks. By assessing these factors, credit bureaus generate a numerical score that reflects a person’s creditworthiness and helps lenders make informed decisions.
Additionally, it is important to note that third-party credit reporting agencies like Borrowell and ClearScore may utilize data from Equifax and TransUnion, but they can still generate a credit score that differs significantly from the scores calculated by the credit bureaus.
How Equifax Calculates Your Credit Score
Equifax, one of the national credit reporting agencies in Canada, employs a comprehensive method to determine your credit score. Let’s discuss some of the factors that Equifax considers when calculating your credit score, and how much they influence the end result.
The payment history accounts for approximately 35% of the score and encompasses details on timely payments, late or missed payments, public records, and collection information. Late payments, amounts owed, and the frequency and recency of missed payments are assessed to determine the impact on your credit score.
Another important factor, constituting around 30% of the score, is the ratio of used credit versus available credit. This factor examines how much of your total available credit is utilized, including credit card balances and revolving lines of credit. The total credit limit or line of credit on a specific account is also considered.
Credit history, comprising about 15% of the score, reflects the length of time your credit accounts have been open. Lenders prefer to observe a consistent track record of responsible credit management over a significant period.
Public records, which contribute approximately 10% to the score, involve any bankruptcy history, collection issues, or other derogatory public records. Such events can negatively impact your credit score.
Lastly, credit checks make up approximately 10% of the credit score. These checks occur when a credit file is accessed, usually due to active credit seeking, such as applying for a loan or credit card. Multiple recent credit checks, combined with other warning signals, can lead to a decline in your credit score.
It’s important to note that Equifax may generate different scores compared to TransUnion, as each credit bureau employs distinct scoring algorithms. Nevertheless, all credit scores aim to predict an individual’s likelihood of paying their bills. Equifax’s calculation method considers various factors to provide a comprehensive assessment of creditworthiness, assisting lenders in making fair and informed decisions.
How TransUnion Calculates Your Credit Score
When it comes to determining your creditworthiness, TransUnion employs a specific methodology to calculate your credit score. Understanding the breakdown of this process can provide valuable insights into how your financial decisions impact your overall score. However, It is worth noting that TransUnion Canada does not provide any details regarding the weighting of your credit score, so we are going by the method they use in the United States.
TransUnion considers several key factors to evaluate your creditworthiness. The largest contributing factor is your payment history, accounting for 40% of your score. Consistent and timely payments demonstrate responsible financial behavior and positively influence your score. Following closely, credit utilization makes up 20% of the calculation. Keeping your credit card balances low in relation to your available credit limit is crucial for maintaining a healthy score.
The length of your credit history also plays a significant role, contributing 21% to your score. Generally, a longer credit history implies a more established financial track record, which is viewed favorably by TransUnion. Additionally, the total amount of recently reported balances affects 11% of your score. Lower balances and limited borrowing indicate responsible credit management.
New credit accounts hold a 5% weightage in the calculation, as opening multiple accounts in a short period might indicate higher risk. Meanwhile, the remaining 3% is determined by your available credit, emphasizing the importance of maintaining a reasonable amount of unused credit.
After considering these factors, TransUnion generates your credit score, which ranges between 300 and 900. Higher scores reflect stronger creditworthiness and increase your chances of obtaining favorable lending terms. Utilizing TransUnion’s credit score check allows you to ascertain where your score falls and monitor your financial progress over time.
How to Check Your Credit Score in Canada
Checking your credit score is an essential part of managing your financial well-being in Canada. It provides you with valuable insights into your creditworthiness and allows you to take proactive steps towards maintaining or improving it. In this section, we will explore the different options available to check your credit score in Canada and how you can make the most of them.
Free Credit Report Options
Canada has regulations in place that entitle you to free credit reports from each credit reporting agency. This means that you have the opportunity to access your credit report without incurring any costs. Let’s take a look at some of the most popular ways to get your credit score for free in Canada.
Borrowell
Borrowell, a renowned name in Canada, has amassed over a million users by offering free credit reports. Pioneering the concept in the country, they introduced a free credit score service in 2016, which garnered immense popularity. Presently, Borrowell provides complimentary Equifax credit reports based on Equifax’s score range and Risk Score of 2.0. By signing up for an account and answering identity verification questions, users gain access to their credit reports without the need for a credit card. Creating an account takes a mere three minutes, granting users access to their credit scores. Members also receive weekly updates on their credit score changes and valuable tips for score improvement.
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ClearScore
ClearScore, a British fintech established in 2015, has gained an impressive user base of over 17 million across multiple countries including Canada, Australia, the United Kingdom, and South Africa. Through its user-friendly mobile app, ClearScore offers insights into one’s payment status, indicating whether they are on track or facing challenges. Obtaining your credit score through ClearScore is free and does not impact your score. This information, which is provided to ClearScore by TransUnion, helps individuals gauge their likelihood of loan approval. ClearScore generates revenue by partnering with more than 150 global financial institutions, allowing them to offer personalized deals on credit cards, loans, and other financial products, including collaborations with leading lenders in Canada.
Credit Karma
Credit Karma provides TransUnion credit scores and reports that are refreshed on a weekly basis. With a vast user base of over 100 million globally, Credit Karma is a trusted platform for accessing free credit scores in Canada. Joining Credit Karma is a quick process that takes only a few minutes. Users are required to answer a few questions to gain access to their credit reports.
CompareHub
CompareHub, a service provided by Loans Canada, offers a unique combination of a free credit score and loan comparison platform. Utilizing Equifax credit scores as the basis for their information, CompareHub provides users with valuable insights into the meaning of their credit scores and offers guidance on improving them. This comprehensive approach allows individuals to not only understand their creditworthiness but also explore suitable loan options tailored to their specific financial situation. By combining credit score information and loan comparison, CompareHub aims to empower users in making informed decisions about their financial health and borrowing options.
Equifax
Equifax offers multiple methods for obtaining a free credit report in Canada without relying on third-party platforms. One convenient option is to sign in to your Equifax account online and request the report. However, this method requires providing identity documents or financial information, and it may take time.
For those who prefer calling, dialing 1-800-465-7166 allows you to request your credit report through Equifax’s automatic system. Verification is done by entering your Social Insurance Number, but this option is not suitable for individuals unwilling to share their SIN. The credit report will be sent by mail within 10 days.
Another option is to request the report by mail. Download and complete the Canadian Credit Report Request Form, including copies of valid identity and address proof documents. At least one of the documents should have your current residential address. Mail the form and required documents to Equifax Canada Co. in Montreal. The report will be sent via mail within 10 business days.
Lastly, visiting an Equifax office in person is an alternative. Bring copies of two documents (a valid identity document and proof of address not older than 90 days) and their originals for verification. Equifax provides a Canada credit report form at the office, which you’ll need to complete and submit.
TransUnion
Similar to Equifax, TransUnion also provides free credit reports in Canada. There are multiple options to request the document, including visiting their office, submitting an online application, or requesting it by mail or phone.
The easiest method is to visit TransUnion’s official website, where you can provide the necessary information, answer identity-related questions, and gain immediate access to your free credit report in Canada.
For those who prefer requesting by mail, a Credit Bureau Request Form should be filled and sent to the specified address in Burlington, Ontario. Along with the form, a copy of a valid government-issued ID card and address proof must be included. The mailing option typically takes 10 business days to receive the credit report.
Alternatively, individuals can call 1-800-663-9980 and follow the instructions to request a copy of their credit report, which will be sent via mail.
Lastly, individuals can visit one of three TransUnion provincial offices located in Nova Scotia, Prince Edward Island, and Ontario. Originals and copies of two identity documents containing the individual’s name, date of birth, photo, and address must be provided. The documents can include a passport, driver’s license, utility bill, or CNIB card. An on-site form needs to be submitted, and a copy of the credit report will be issued.
When you obtain your free credit report, it is crucial to carefully review it and ensure that all the information is accurate. By doing so, you can identify any errors or fraudulent activities that may be affecting your credit score. Keep in mind that even a small error can have a significant impact on your creditworthiness, so it’s important to address any discrepancies promptly.
Monitoring your credit score regularly is an excellent practice to adopt. By taking advantage of the free credit report options, you can keep a close eye on your creditworthiness and track any changes over time. This enables you to stay informed about your financial standing and take necessary actions if you notice any negative trends.
Paid Credit Report Options
In addition to the free credit report options, both TransUnion and Equifax offer paid credit monitoring services. These services provide you with more comprehensive tools and features to help you manage your credit effectively.
One such example is the Equifax Complete Premier credit monitoring and identity theft protection service offered by Equifax Canada. For a price of $24.95 per month, you can enjoy various benefits such as credit and credit score monitoring, identity theft protection, and identity theft insurance of up to $1 million.
Paid credit monitoring services offer regular updates on changes to your credit file, keeping you informed about new accounts, credit checks, and other impactful changes. Timely alerts allow you to detect potential fraud and take swift action to safeguard your finances. Additionally, these services provide enhanced credit reports and scores, offering in-depth insights into your payment patterns, credit utilization ratio, and negative remarks. This information helps you identify areas for improvement and take proactive measures to enhance your creditworthiness.
It’s important to note that while paid credit report options offer additional benefits, they are not necessary for everyone. If you only need to check your credit score occasionally or are satisfied with the information provided in the free credit reports, you may not require the extra features offered by the paid services.
Credit Score Calculations: The Bottom Line
In conclusion, gaining a comprehensive understanding of how your credit score is determined holds immense importance in effectively managing your financial well-being in Canada. It is crucial to recognize that credit reporting agencies employ diverse methods to calculate your credit score. By familiarizing yourself with these methods and regularly monitoring your credit report, you can proactively take measures to uphold and enhance your creditworthiness. Keep in mind that a favorable credit score not only unlocks better financial prospects but also empowers you to pursue your goals with a sense of security and assurance.
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