What is a Credit Score? The Complete Guide For Canadians

credit score meter

    A healthy credit score generally reflects responsible financial management. It can help you get more favorable loan terms and lower interest rates when you borrow money to buy a house, study or for any other project requiring a large amount. On the contrary, a bad credit score could have negative impacts on your access to property, credit cards applications and even harm your career! Lenders, insurers and many other companies use your credit score to determine how likely you are to pay them on time. Below is everything you need to understand credit scores in Canada and how to check yours before applying for loans.

    What is a credit score?

    A credit score is a number on a scale of 300 to 900. It tells potential lenders how well you manage debt and credit; money that doesn’t belong to you. You should aim for a credit score of at least 660 to come across well when applying for loans.

    The higher the score, the better you are at repaying your debts. The lower the score, the less likely you are to repay your debts. As soon as you get your first credit card, you earn points when you show you’re using it responsibly, and you lose points if you have trouble managing credit.

    A good credit score (of 660 or higher) can unlock higher lending amounts, lower interest rates and more favourable loan terms. It even influences your insurance premiums in many provinces.

    Poor credit scores do the opposite. Lower than average scores limit how much money lenders will advance to you, and you’ll get charged higher interest rates too. If your credit score is very poor, you could be denied credit altogether.

    How is your credit score calculated?

    Your credit score is based on the information your creditors share with the credit reporting agencies (or credit bureaus), TransUnion and Equifax. They each use their own specific formulas and algorithms to analyze the information on your credit report to calculate your credit score. While your credit score may differ between the credit bureaus, they all use the following components as part of their credit score calculation process, and each component is similarly weighted in your credit score by both bureaus:

    Payment history (35%)

    Do you pay your bills on time? I hope so, because your payment history is the most important part of your credit score. Your repayment behaviour makes up 35% of your total credit score. Why? Because it’s the number one indicator that tells lenders whether or not you will pay them back.  

    If you have a spotless repayment history, lenders have peace of mind that you will pay your loan as agreed. It is unlikely they will have to call you looking for your payment, or send your account to a collection agency.

    Credit utilization (30%)

    The second most important part of your credit score is your credit utilization ratio. It measures how much money you have access to from credit cards and lines of credit, versus how much of that money you have already spent.

    Those with a low credit utilization ratio are either carrying very low balances on their credit cards and lines of credit, or they don’t carry balances at all. Those with a high credit utilization ratio are carrying balances. It is a red flag that you may be using credit to supplement your income, or that you have trouble managing your money. To avoid having a high ratio, do not use more than 35% of the credit allocated to you. For example, if your credit limit is $10,000, spend only $3,500.

    Account types (15%)

    Having multiple types of credit, including credit cards, an auto loan, a mortgage, and a line of credit, improves your credit score. However, you should not exceed the limits and go into debt beyond your capacity. If you only have one credit card and are hesitant to apply for larger loans because you don’t need them, having a second credit card of a different type, such as a store credit card, may be beneficial for you.

    You may see codes indicating the type of credit on your credit report. For example, an installment loan such as a car loan will be rated I, plus a number from 1 to 9. In this case, you would see I1 if your payments are made correctly. In the case of a revolving credit such as a credit card that is paid a little late, you would get the R2 code. There is also the letter O for open credit (such as lines of credit) and M for mortgage. The number 1 means you pay your bills within 30 days and helps increase your credit score. Starting at number 7, you are in serious trouble (it indicates a consumer proposal or a debt management plan).

    Number of inquiries (10%)

    Every time you apply for credit your potential lender will “pull” or “check” your credit. That means they’ve requested a copy of your credit report from Equifax or TransUnion, and that request is recorded on your report as an inquiry. There are two types of credit checks:

    Soft: Soft credit checks do not affect your score because they are not directly related to new credit, such as when an employer checks your credit, or when you check it yourself. You can check your credit report as many times as you want without affecting your credit score.

    Hard: Hard credit checks happen every time you apply for credit and they affect your credit score, but only temporarily. If you have several hard credit checks in a short period of time, it signals that you are desperate for credit. The scoring algorithm considers this very risky behaviour and your credit score will drop significantly. 

    Hard credit checks require your consent in every province and territory in Canada except for three: Nova Scotia, Prince Edward Island, and Saskatchewan. In these provinces, they only need to notify you about a credit check, they do not need your permission to check it.

    Age of credit (10%)

    Finally, let’s not forget the overall age of your credit file and your individual credit accounts. When lenders check your credit file, they’re looking at your history managing debt. 

    The older your file is, the more insight lenders have about your borrowing behaviour. If you are new to credit you will naturally have a lower score. That’s because there isn’t enough history or information to accurately assess how well you manage your debt over time. If you are a student or new to Canada, you can start building your credit history right away with credit cards that are easy to get. Many lenders offer credit products for those just starting out on their credit journey.

    Who can access your credit score?

    Nowadays, you need to have good credit for pretty much everything. Need a cell phone plan, a new car insurance or want to apply for an apartment? Your credit score will influence your success. Insurance providers are starting to use credit scores to help determine the cost of premiums, and even some employers require a credit check before they’ll consider hiring you. 

    Who else can see your credit score? Besides landlords and insurers, credit card issuers, auto loan lenders, potential employers, telecommunications companies, mortgage lenders, utility companies and government agencies are allowed to check your creditworthiness.

    Most people don’t have enough money to pay cash for a new car or a new house. We all need to borrow money at some point in our lives. Your credit score is incredibly important because it dictates whether or not you can borrow money when you need it, how much you can borrow, and the interest rate.

    Where to find your credit score?

    About 50% of Canadians have already checked their credit score. Over the course of a year, 22% reported having ordered their credit report. Do you want to be like them? It is very simple. There are several companies that can let you see your credit score for free and read your credit report online, including Borrowell and ClearScore. If you already have online access to your Scotiabank, Desjardins, RBC, CIBC or BMO accounts, the easiest solution is probably to log in because these financial institutions allow you to view your credit score. You can also obtain the information you are looking for directly from Equifax or TransUnion. In any case, this credit check should have no impact on your credit score.

    What to do if there are errors in your file?

    Let’s say you notice a personal loan that you don’t remember applying for. Start by contacting the loan provider to alert them that someone else has used your name or that there has simply been an error. Then, to have the erroneous information removed from your credit files, you must initiate an Equifax dispute or a TransUnion dispute.

    Credit score numbers: What do they mean?

    That’s it! You’ve checked your credit score for free and you’re surprised by the number. But mostly, you are not sure what it means.

    Credit scores fall into 5 risk categories. The list below comes from Equifax, but your bank, for example, could use slightly different ranges, especially if it is based on TransUnion scores.

    Excellent Credit Score (760-900)

    This credit score range unlocks quick, sometimes instant, loan approvals. You’ll enjoy the lowest possible interest rates and access to exclusive credit products like top credit cards with lucrative points and cash back rewards.

    It takes a lot of hard work and discipline to get here. You’ve never missed a payment, you pay off your credit card balances in full each month, and you only apply for credit when it makes sense. 

    Very Good Credit Score (725-759)

    Great job! You’ve managed your debt very well and built a credit score to be proud of. You’re financially literate and you manage your personal finances well. You only apply for credit when you really need it. You hardly ever miss a payment and your credit card balances are probably quite low. 

    In this credit score range, you won’t be turned down for credit. Your hard work and debt management skills have unlocked lower interest rates and premium credit card rewards. You may not get that coveted BMO eclipse Visa Infinite Privilege credit card, but you still get access to premium products at lower rates with better rewards.

    Good Credit Score (660-724)

    Well done, young grasshopper! You have good credit. Sure, it could be better. You’ve probably missed a payment here and there. Maybe that credit card you forgot about was sent to collections. 

    Or maybe you’ve never missed a payment or defaulted, but you’re simply carrying higher balances on your credit cards month over month. You’ve made some mistakes, but nothing you can’t bounce back from. 

    Credit scores in this range will generally not have a problem getting approved for lending. However, you might experience higher interest rates and possibly lower lending amounts.

    Fair Credit Score (560-659)

    Unfortunately, your credit score is below that of the average Canadian. You’ll find it difficult to get approved for lending at a traditional bank or credit union. You’ve likely missed quite a few payments or all your credit cards are maxed out, or a mix of both. And you for sure have some bad debt sitting in collections.

    The good news is that there are still lending products available to you, but you’ll be charged much higher interest rates. You may even be asked to secure a loan with some collateral or a co-signer. Also, you probably no longer qualify for more lucrative rewards credit cards and may have to settle for basic credit card products. 

    Poor Credit Score (300-559)

    Oh, dear. Looks like you’ve had a rough time and life handed you a bag of lemons. You’ve missed a lot of payments. Your lenders have charged off a few of your accounts or sent them to collection agencies. And your credit cards are probably charged up over their limits. You’ve gone through a bankruptcy or consumer proposal in the past, going through it now, or on your way there. At this point, the major banks and credit unions won’t lend to you. 

    You probably can’t open any new credit cards and may be forced to use a secured credit card instead.  But don’t despair. You can come back from this. It will just take time and discipline to increase your credit score.

    What’s in your credit report?

    Your credit report is a file that summarizes your history using credit. Every time you apply for a loan or other credit product, it’s documented in your credit file. Your lender sends information about you and that debt to a credit bureau. Each lender then sends a monthly report to the credit bureaus on how you are managing the credit they have extended to you.

    Credit reporting agencies document all of your credit items, analyze how you manage them, and then use that information to rate you on a scale of 300 to 900: your credit score.

    But who are these credit bureaus and how do they calculate your credit score? There are two credit reporting agencies: Equifax and TransUnion. They share information with lenders each time you apply for new credit or refinance an existing loan.

    Borrowing information

    Your credit report will display information about your credit products, and all your borrowing activity. Late payments, collections, charge-offs, and first-time bankruptcy can stay on your credit report for up to 7 years.

    • Type of credit product such as a credit card, line of credit, installment loan, etc. 
    • Date the credit account was opened 
    • Balance owing
    • Minimum monthly payment amount
    • Payment history and behaviour 
    • Number of payments made to date
    • Status of your credit account
    • Lender notes such as if a credit account is part of a credit counselling program

    Personal information

    Lenders and financial institutions have certain reporting regulations they need to follow in order to protect consumers from fraud and identity theft, commonly referred to as “know your customer” information (KYC). 

    Your credit report contains personal information about you to ensure lenders have the correct credit file and to ensure they are funding legitimate loans to genuine borrowers. On your credit report, you can expect to see your: 

    • Social Insurance Number 
    • Full legal name 
    • Date of birth 
    • Legal and /or civic address
    • Previous addresses
    • Past and present employer 
    • Past and present job title

    Other financial information

    Your credit report may also contain other financial information that may not be directly related to debt or credit. Other things that can appear on your credit report and affect your credit score are: 

    • Cell phone and cable accounts 
    • Utility accounts
    • Fraud alerts
    • Identity verification requests
    • Consumer notes
    • Registered debts such as a lien on a vehicle or a mortgage
    • Inquiries from other lenders 
    • Court judgements for things like unpaid speeding tickets, income taxes, child support, etc
    • Court judgements from civil lawsuits over monies owed
    • Chequing or savings accounts closed for cause, such as unpaid overdraft or fraud
    • Credit accounts sent to a collection agency
    • Bankruptcies, consumer proposals or credit counselling programs

    How to build your credit score in Canada

    Building a good credit score can be a daunting task if you’re new to credit. But trying to repair damaged credit is even harder. If you’re brand new to credit your credit score will naturally be lower simply because lenders don’t have a long history to draw from.

    It doesn’t matter if you’re new to credit or if your credit score has taken a beating over time, there are easy ways to get yourself back on track. No matter your situation, a little hard work, discipline and patience will get you exactly where you need to be. Let’s take a look at the easiest ways to increase your credit score in Canada:

    • Check your credit report for errors (and have them corrected)
    • Never miss a payment (pay your accounts on time and in full)
    • Keep your balances low
    • Pay off your bad debts (most collection agencies will work out a payment plan with you or agree to a reduction of the balance owed)
    • Diversify your debts (credit cards, car loan, line of credit, etc.)
    • Avoid opening new credit accounts if you don’t need them
    • Do not close your old credit accounts

    If your credit is damaged, a secured card will help you regain control of it. Secured credit cards accept consumers with fair or low credit scores in exchange for a security deposit, which usually becomes their credit limit.

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    Want to avoid credit cards because they got you into this mess? Don’t worry, you can still repair your credit score with other tools. For example, KOHO offers a Credit Builder feature with its all-in-one account and prepaid card.

    Your credit score is constantly changing. If you have bad credit now, you are not doomed to pay crazy interest rates forever. The more you understand how your credit score works, the more empowered you are to take back control of your credit and quickly increase your credit score. If you’re new to credit, the most important thing you need before any journey is knowledge. Now that you have it, you’re well on your way to building excellent credit and financial independence.

    FAQs about credit scores in Canada

    Are your late payments systematically displayed on the credit report?

    I am far from ​​encouraging budget laziness, but a very slight delay on a credit card or a mobile phone account is no reason to sleep badly at night.
    If you missed a payment that is only a few days past due, it is very unlikely that the delay is already listed in your Equifax and TransUnion records. Although it is not explicitly mentioned, most lenders and providers allow additional time before notifying a delay with the credit rating agencies.
    Be careful though. These small delays could harm you in the eyes of the organization with which you’re doing business; for example should you seek a limit increase or a reduced interest rate.

    Does a cheque with insufficient funds impact your credit score?

    In addition to being a great way to lose friends and sympathy from your financial institution, a bad cheque may appear on your credit report. So yes, insufficient funds can hurt credit!
    Otherwise, transactions made through the bank account and credit card are not listed on your credit report. Whether you spend all of your pay at the casino or on donations to support sick children, the credit bureaus don’t care. As long as you pay your bills on time!

    Does your score drop when your credit report is checked?

    If you want to check your credit score daily, indulge yourself! Soft inquiries, that is, requests that are not submitted as part of a financing request, have no impact on your credit score.
    But a hard check can have a negative impact on your score. The logic is simple: a person who has multiple requests for financing over a short period of time sends worrying signals about their financial health.
    So if you’re shopping for a mortgage, now is not the time to go for all the credit card offers that come your way.

    Does bankruptcy reset the counter to zero on your credit report?

    Bankruptcy allows you to protect yourself from your creditors and start anew (in a way), but Equifax and TransUnion have long memories (7 years to be precise). Will you have to wait 7 years before you can borrow again? Not likely. For example, a high-income person will usually regain access to credit well before the end of their financial “purgatory”. But let’s be frank. If you’ve declared bankruptcy recently, getting financing may not be what you need right now. Rather, it is an opportunity to reconnect with better consumption habits.

    Can I get my credit score for free?

    In Canada, you have the right to order your Equifax or TransUnion file free of charge. You can also use the free services of Borrowell and ClearScore for partial access to information in your file.

    Who has the right to check your credit report?

    Almost anyone can view your credit report, provided that you consent to it. It’s not just lenders who care about your score, but many landlords and employers are also curious about the bottom line of your financial life. 
    So should you be worried if a potential employer requests a credit file check as part of the hiring process? I highly doubt that anyone has lost job opportunity due to a 2-month delay from 2016 or has a debt ratio that is a tad too high. Employers generally use the credit report as a final “disaster check”. In other words, their main objective is to confirm that your financial management is not so problematic as to cast doubt on the qualities you have demonstrated in an interview. If you are really worried that the state of your credit report may affect your chances, it is best to let the employer know in order to put things into context. But don’t be fooled! No employer will openly admit that your bad credit meant that you weren’t selected for the job.

    Heidi Unrau is a senior finance journalist at Hardbacon. She studied Economics at the University of Winnipeg, where she fell in love with all-things-finance. At 25, she kicked-off her financial career in retail banking as a teller. She quickly progressed to become a Credit Analyst and then Private Lender. This hands-on industry experience uniquely positions her to provide expert insight on loans, credit scores, credit cards, debt, and banking services. She has been featured in publications such as WealthRocket, Scary Mommy, Credello, and Plooto. When she's not chasing after her two little boys, you'll find her hiding in the car listening to the Freakonomics podcast, or binge-watching financial crime documentaries with a bowl of ice cream. Fun Fact: Heidi has lived in five different provinces across Canada and her blood type is coffee.