What is a credit score?
Your credit score is a three-digit number that sits between 300 to 900. This score shows your creditworthiness. It signifies how likely you are to repay the money you borrow, pay bills on time, and not default on loans. The higher your credit score, the better! A higher score means you appear more financially trustworthy to lenders and landlords.
Why do good credit scores matter?
- Loan and credit approval – Banks and lenders use credit scores to decide whether to approve a loan application. A good credit score indicates you are financially responsible. They know you will be able to pay it back on time and are, therefore, more likely to get approved.
- Interest rates – A higher credit score can help you qualify for lower interest rates. If you have a good credit score, lenders are more willing to negotiate the terms of the loan, including a better rate.
- Rent – Some landlords may check credit scores to assess your reliability as a tenant. A higher credit score signifies you have a history of paying your bills on time. From a landlord’s point of view, this is a strong positive in your application. If they have similar applications for a place, they may choose the applicant who has good credit scores and a decent credit history.
- Employment – For some jobs, credit checks are a necessary part of the hiring process. Most often, they are jobs that involve some level of financial responsibility. It’s a way of verifying that an applicant can “walk the talk” and truly has the ability to manage and handle money.
Credit score ranges in Canada
In Canada, our main credit bureaus are Equifax and TransUnion. They calculate the scores based on information reported by banks, lenders, and other financial institutions. These credit reporting bureaus have their own scoring models to do the calculations. They both use proprietary models, so your scores could vary slightly between them. However, your scores are likely to be in a similar range, whether you check Equifax or TransUnion. Below is a table outlining the categories of credit score ranges and how they are each interpreted by lenders.
| Score Range | Rating | What it Means |
|---|---|---|
| 800-900 | Excellent | Access to most credit products at the best rate |
| 740-799 | Very Good | Very likely to be approved for credit at good rates |
| 670-739 | Good | Generally approved for credit products (loans, credit cards …), good rates, but not the best |
| 580-669 | Fair | Limited access to credit products, may result in higher interest rates |
| 300-579 | Poor | Less access to credit products, difficult to get approved, no opportunity of negotiation for better interest rate |
Factors that affect your credit score
There are five main factors that affect a credit score. Each one carries a different weight.
Payment history (35%) – The biggest factor that affects your credit score is whether you pay bills on time.
Credit utilization (30%) – Your “credit utilization” is the percentage of available credit you’re using. If you’re using almost all your available credit every month, lenders consider it a red flag. That’s why a high percentage can lower your score. It is recommended not to use more than 30% of your available credit at any one time to maintain a good score.
Length of credit history (15%) – A longer history of responsible credit use leads to a better score over time. To check your history, look at your oldest account and the average age of all your accounts. A consistent payment history pattern takes time to build and shows your financial management and consistency.
Types of credit (10%) – There are two types of credit, installment and revolving. Installment credit are things like mortgages and car loans. With this type of credit, you don’t regain access to credit as you pay off the debt. Whereas, with revolving credit, you do regain access to credit as the debt is paid off. Credit cards are the most popular form of revolving credit. Credit bureaus like to see a mix of both credit types on your account. It shows you can handle different kinds of credit and are consistent with all of them.
Multiple hard inquiries (10%) – Whenever you apply for credit, financial institutions do a “hard inquiry” on your credit, which is recorded on your credit history. Multiple hard inquiries in a short amount of time can temporarily lower your score.
How to improve your credit scores
- Check your credit report and stay on top of any new developments or errors. You’re entitled to a free credit report from Equifax and TransUnion once a year. You can dispute errors with the credit bureau to have them changed or removed.
- Pay bills on time. Late or missed payments have a big negative impact on your credit score. Set reminders or set up autopayments to ensure you don’t miss your due dates.
- Use below 30% of your available credit, ideally. For example, if your credit card limit is $2000, try to keep your balance under $600.
- Don’t apply for multiple credit products in a short time span. Each application can lead to a “hard inquiry,” which can lower your score.
- Improve your credit mix by using a variety of credit products, like a line of credit and a car payment.
- If you want to improve your credit or build a credit history from scratch, consider a credit builder loan. This is when you make regular payments to a lender, which they then report to the credit bureaus. The lender holds the money in an account over the time period of the loan. Once you’ve fulfilled the terms of the agreement, they return the money to you, minus a service fee. It’s a way of showing a positive payment history to credit bureaus.
- There are now companies that offer rent reporting services. For a fee, they will report your rent payments to the credit bureau. This can also help you build credit and showcase reliability.
- Maintain older accounts. If your oldest account is much older than your other accounts, it may well be contributing to your good credit history. Leave that account open if possible, and if you can afford to do so.
Key takeaways
Credit scores range from 300 to 900. A good credit score can benefit you in many ways. The most significant factors affecting your credit score are payment history and credit utilization. Good credit scores can help with better rates and terms, as well as access to most credit products. Building a good credit history takes time, but it has many benefits.
