To be accepted for credit, such as a loan, you must have a good credit score.
In this beginner’s guide, you’ll learn everything you need to know about Canadian credit scores, including how credit scores work, how they are calculated and what this means for you.
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 good credit score gives you a better chance of borrowing money while also benefiting 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 from your credit report is used to calculate a three-digit number, which is your credit score.
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 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 the risk of lending money to you.
Even if you have a good score, lenders have different criteria. This means you might be refused by one company but accepted by another.
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 timely payments. 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 and can result in you paying more to borrow money. It could even affect your job prospects or your ability to rent a home.
What is considered a good credit score in Canada?
According to Equifax Canada, 660 or higher is considered a good credit score.
Here’s a breakdown of credit scores and how lenders view them:
Poor: 300-559
Getting credit will be challenging, 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 will 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.
How a credit score is calculated
Your credit score is calculated using the following factors:
- 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%
Along with your credit score, other factors, such as your income and employment status, determine your creditworthiness. Your credit score may vary slightly depending on the scoring model used by the credit bureau.
The difference between Equifax and TransUnion
In Canada, your credit score will differ depending on whether you use Equifax or TransUnion. This is normal and nothing to worry about.
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 |
|
| Fair: 560-659 |
|
| Good: 660-724 |
|
| Very good: 725-759 |
|
| Excellent: 760-900 |
|
How do credit scores go up?
Your score improves when you make positive decisions, such as making payments on time and reducing your balances.
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 stop this from happening.
What damages your credit score?
A credit score is calculated using a variety of factors relating to your credit history and payment behaviour.
Your credit score decreases if you have negative information on your credit report, such as:
- 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 with 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.
Lenders also consider 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 credit counselling negatively affects your credit score. Bankruptcy also damages your credit score.
Why a credit score is important
Your credit score is essential because it impacts your chances of getting credit, such as loans, credit cards and mortgages.
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 low score, and you may need to offer collateral as security.
In some industries, such as the financial sector, your credit history can affect your job prospects if an employer performs a credit check. Landlords 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.
How often is a credit score updated?
Your credit score is updated at least once every 30 days. This changes when lenders report new information 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.
Frequently asked questions about credit scores
How does debt affect your credit score?
Too much debt damages your credit score. Credit bureaus consider your credit utilization ratio, which compares how much credit you use from the total available. Ideally, you want to use no more than 30% of your available credit.
Why do credit scores drop?
Your credit score drops when something in your credit report is added or changed. This can be for many reasons, but this is often due to late or missed payments, using too much credit or too many credit applications.
Do collections affect your credit score?
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.
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.
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.
Credit score vs credit report: what’s the difference?
A credit report is a detailed list of your credit history over time, including your accounts, payment history and inquiries. A credit score is a number calculated from the information in your credit report, allowing lenders to determine your creditworthiness.
Wrapping up
Your credit score represents the likelihood of you paying your creditors back. It goes up when you use credit responsibly and down when you don’t.
A good credit score unlocks the best credit products at the best rates, allowing you to achieve your financial goals at a lower cost.
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