Roughly 7 in 10 Canadians don’t know their current credit score, and 4 in 10 say they don’t even want to know it, according to Ipsos.
Being part of the “confused about credit” club shouldn’t give you too much comfort, though. Your credit score is more important than you might realize and it can have a major impact on your life, whether you want to understand it or not. It can impact the loans yoyou’repproved for (from small ones like buying a new cell phone to large ones like getting a mortgage) and even whether landlords approve your rental applications.
If you want to take more control over your financial future, learning the basics of credit scores and credit reports is a great place to start.
So, let’s start with the most basic question.
What is Credit?
Credit is an agreement between a lender and a borrower. It generally refers to a person’s ability to borrow money from a lender, with the agreement to repay it later under specific terms. This can be in the form of a credit card, mortgage, small business loan, and so on.
For credit to work, the lender needs to trust that the borrower will be able to pay back the loan on time. One way lenders assess how much they trust a borrower is by looking at the borrower’s score.
You’ve Likely heard the phrases “bad credit” or “good credit” before. These are general terms that broadly refer to a person’s score. If you have good credit, it means you’ll have more trust and confidence in your ability to repay a loan. Therefore, they’ll be more likely to approve your application. If you have bad credit, you might have a hard time getting approved for loans, even for something small like a new cell phone.
People with good credit tend to be approved for lower interest rates than those with bad credit. This is because there is a higher likelihood of default among borrowers with bad credit, and lenders offset their financial risk by charging higher interest rates.
The good news is that, with the right behaviours, Canadians with bad credit can increase their credit score and achieve a good credit rating. On the other hand, there are ways to lower your credit score too. You’ll learn more about this below.
What is a Credit Report?
A credit report is a document that is created and maintained by the credit bureaus. It includes personal information (such as your name, Social Insurance Number, and address) as well as details of your entire financial history as it pertains to credit. It’s also known as “consumer disclosure”. Think about it like a report card. Financial information you’d find in your credit report might include:
- Payment history
- Negative bank account information (overdraft)
- Collection debt or bankruptcy information
- Types of credit used (lines of credit, loans, credit cards, etc.) and when you opened the accounts, how much you’ve been approved for, how much available credit you’re currently using, if you’ve been late with payments, and more.
Your credit score, a three-digit number ranging from 300 to 900, is calculated from the information in your credit report.
What are Credit Bureaus?
Credit bureaus collect and track individuals’ credit ratings and histories. There are two credit bureaus in Canada—Equifax and TransUnion. Each company has slightly different ways of calculating a credit score, but they’re similar. The credit scores calculated by these bureaus are then made available to lenders when they’re reviewing loan applications.
What is a Credit Score?
A credit score is a three-digit number between 300 and 900 that a credit bureau has calculated. Its purpose is to grade an individual’s likelihood of paying their bills on time. The higher the number, the more trustworthy an individual looks to potential lenders.
Credit scores are calculated based on several factors in your credit report. Some of the main ones—according to the credit bureau Equifax—include:
- Payment history: How often do you pay your bills on time? Do you have a history of late or missed payments?
- Used vs. available credit: How much of the total credit available to you are you using?
- Credit history: How long have your credit accounts been active? Have you been able to handle credit accounts over a long period of time?
- Public records: Do you have a history of collections or bankruptcy?
- Credit inquiries: Have there been many recent hard inquiries into your credit file?
What is a Good Credit Score in Canada?
A “good” credit score in Canada is considered to be anything over 660, but the really favourable conditions begin after 760. Once you’ve established good credit, you’ll be able to access more loan products with favourable terms and lower interest rates. Good credit also makes it easier to find employment and provides more housing options.
How to Improve Your Credit Score
If your credit score is on the low side and you want to improve it, there are a few things you can do to move it in the right direction.
- Always pay your bills on time: Accounting for 35% of your credit score calculation, payment history is the single biggest factor in how your credit score is calculated. That means you should make sure that you pay every single bill on time and in full. Every late or missed payment will damage your credit score. On the other hand, every bill paid on time and in full will improve your credit score. It’s all about consistency. Lenders want to see a consistent pattern of bills paid on time and in full.
- Control your credit card spending: Credit cards (and other types of revolving credit) can help you build credit, but only if you can keep your credit utilization rate low. According to the credit bureau Equifax, you should use no more than 30% of the revolving credit available to you. For example, if you have two credit cards with a combined limit of $2,000, try to keep your combined balance under $600 at any given time.
- Use different types of credit: Institutions have more confidence lending to borrowers who prove they can manage a diverse mix of credit (personal loans, car loans, mortgage, credit cards, etc.). But that doesn’t mean you should apply for every loan product you can get your hands on. You should be thoughtful and selective when choosing loan products, as discussed below.
- Be selective with credit: You should only apply for new loan products that are essential and beneficial to your personal finances. Applying for lots of different loan products in a short space of time will reflect poorly on your credit report.
How A Good Credit Mix Can Affect Your Credit
While even having one piece of credit can impact your credit score, having more isn’t better. If you have a bunch of the same type of credit, then this isn’t risn’t helping lenders see how you can manage your finances, but having a good credit mix can really be beneficial.
An example of this would be having a phone bill, a credit card and a personal loan. Not only will having these three things in good standing be good for your credit score, but it will also show lenders that you can handle a variety of finances, which could improve your chances of approval.
What Causes My Credit Score to Drop?
If you’ve you’vey established good credit, or you’re trying to improve your credit, you need to be aware of what behaviours will lower your credit score. If your credit score drops too low, you’ll find it hard to get approved for new loans and credit products.
- Missing payments: Payment history is the single biggest factor in how credit bureaus calculate your credit score. When you miss payments, or your payments are late, it can be a big blow to your credit score.
- Racking up credit card debt: Credit cards are a great way to build up positive credit,t but lenders get wary when you’re using too much of the credit available to you. If your credit utilization is above 30-35%, your credit score may take a hit.
- Applying for too many loan products: When you apply for a new credit card or loan, the lender checks your credit score. This is called a “hard pull”. When you apply for several different types of loans (mortgage, auto, credit card) all in a short period of time, there will be several “hard pulls” on your credit report, and bureaus may view it as a sign of financial hardship.
- Closing older accounts: It might sound counterintuitive, but since credit history is an important factor that determines your credit score, closing the account of an old, unused credit card can actually lower your credit score.
Different Types of Credit in Canada and How They Work
When it comes to credit in Canada, there are four main types: Open, Revolving, Mortgage and Installment. That said, within each type of credit you will find different credit products. Let’s take a look at what these are and how they work.
Open Credit
Open credit refers to phone bills with mobile phone companies, cable bills and any other kinds of monthly bills that are reported to the credit bureaus. These are the bills that require a credit check to open the account. While these accounts won’t build your credit score, missing payments can hurt it. This is because only the payments that you miss will be reported. This is actually how paying your bills on time can affect your credit score.
Revolving Credit
The most popular type of credit is revolving credit. This refers to credit accounts like credit cards and lines of credit. The reason that it’s called revolving credit is that they aren’t one-time loans. You can spend and pay off what you use on these accounts, while continuing to use them.
With revolving credit, you’re given a maximum credit limit that you can use. However, to keep your account in good standing, you must make your monthly payments on time. What most people don’t know, either, is that using the maximum amount of your allotted credit limit can also harm your credit score. To maximize your credit score, you want to keep your total credit used less than 30% of your total credit limit.
When we refer to your total credit limit, we mean the sum of all your credit limits. So, say you have both a credit card and a line of credit, with a $2,000 limit on each. This would give you a total credit limit of $4,000. It doesn’t matter the breakdown of what amount is on each credit product, as long as the total is below 30%.
Installment Credit
Installment credit refers to credit products that allow you to purchase an item for a fixed price and pay it back over time. It can also refer to borrowing a set amount of money with predetermined payments over time. Each of these accounts will also have an end date when the payments will be completed.
Installment loans include personal and auto loans. When you borrow money using these methods, you receive the money or the item up front. The payments then come out of your account until the item’s amount owed is paid in full. How it affects your credit score is different from that of a revolving credit account.
The amount you borrow doesn’t have much of an effect on your credit score. With installment credit, it’s your payments that matter. All positive payments affect your credit, as do missed payments. This is why using an installment loan responsibly can have such an impact on your credit score. That said, if the loan is for an asset like a car, missing payments can not only result in a hit to your credit score but also in the asset being repossessed.
Mortgage Credit
While a mortgage can also be considered a type of installment credit, it has a slightly different structure, so some consider it to be in a credit category of its own. Technically, mortgages are a form of secured loan. This means the home is yours as long as you make your payments on time. That said, missing your payments could result in a foreclosure on your home.
The reason mortgages differ from your typical installment loan is that you have an initial amortization period you’re approved for. This period typically ranges from 25 to 30 years and determines how long it will take you to pay off the mortgage. However, the specifics of a mortgage loan work a little bit differently.
Separate from the amortization period of a mortgage is the term. This works because a mortgage is typically renewed every 3 to 5 years with a lender, depending on the term you choose. With this term, the mortgage interest rate also changes. So even though you’re technically approved for a 25-year mortgage, you do have to renew your mortgage term every 3 to 5 years, depending on your contract.
Do I Have a Credit Score and Not Know It?
The vast majority of Canadians don’t know their credit score, but it’s a good idea to check it every so often.
- It will give you a good idea of what to expect regarding approval rates.
- It is a good way to identify any errors or fraudulent activity on your report.
- If you have bad credit, it will help you determine whether you need to change some of your spending behaviours.
It’s possible to request your credit report from either of the credit bureaus in Canada, Equifax or TransUnion, but the process can take several days. Each bureau offers several ways to request your report, and not all are free, so make sure you’re choosing the correct option.
The simplest way to check your credit score, absolutely free, is with an online service like Borrowell. You can sign up and get free access to your Equifax credit score in a few minutes. Plus, the app uses an AI credit coach to provide you with personalized tips to improve your credit score over time.
Checking Your Credit Score for Free
In Canada, you must keep your credit score up to date. This is because your credit is used not only to obtain more credit products, but also by prospective employers and landlords to assess your dependability as an employee or renter. You can easily keep an eye on it using a free credit report through the following sources.
Borrowell
Borrowell allows you access to your free credit score and credit report from Equifax. Equifax is one of the main credit bureaus and has its own scoring model, different from TransUnion. By using this to check your own credit report, you can see any credit products you have, even student loans and those through private companies. You can also check your score often since they do frequent credit checks. There’s even access to information on how to get a higher credit score and which products will work best for you.
Credit Karma
Just like Borrowell, Credit Karma gives you access to your credit score through one of the two main credit bureaus, except they use TransUnion. And just like Borrowell, TransUnion has its own criteria and credit products it uses to determine your credit score.
Credit Karma shows you the minimum credit score you need for some credit products, which credit card issuers and credit card companies are most likely to give you a credit card, and which areas of your credit report you need to work on to improve your score. They also give you education on how credit scores work and notify you if you have too many credit checks on your report.
Clear Score
Clear Score is another free credit monitoring tool that gives you access to your TransUnion report. Scoreill show you a breakdown of your credit report, including any activity from collection agencies or creditors. It will also break down how you use your credit and what negatively impacts it. Any late payments and store cards you have will also show up.
Transunion
While TransUnion does allow you to monitor your credit with them for a monthly fee, you’re also able to get one free copy of your credit report per year. This is usually a hard credit check, so it’s a very detailed breakdown of your credit.
Equifax
With Equifax, you can get a free copy of your full credit report every year. You can also choose to sign up for monthly credit monitoring, just like TransUnion.
Paid Credit Score Apps
While there are plenty of free credit score apps, there are also lots of paid ones that offer exclusive features. One of these is Credit Verify. One of the exclusive features it offers, in addition to providing your credit score, is the credit score simulator. This is extremely useful for those looking to improve their score.
The Most Powerful Form of Credit for Your Credit Score
While any form of credit can affect your credit score, the most powerful is a credit card. As we mentioned, how you use a credit card can have a large impact on your credit health. Keeping your credit below 30% of your available limits is a big part of this. That said, you can’t always pay it off. A trick you can use to keep your usage low is to get a credit increase on another form of revolving credit.
That said, because everyone’s financial situation is different, it can be difficult to get a credit card. This is where secured credit cards come in. They’re known for granting credit to anyone as long as you pay the security deposit. The credit card can then be used to improve your credit score. It’s a great way for those who have trouble managing credit to learn and improve their score.
Final Thoughts
When it comes to credit scores in Canada, the consensus is the higher, the beScore To achieve this, you want to have a good credit mix, keep your credit usage low, and pay all your bills on time. That said, if your credit score does take a hit, it’s not impossible to improve it.
While improving a credit score can be more difficult than just making your bill payments on time, there are ways you can do it. There are even credit products out there that are designed to improve your credit score. No matter what your score is, it’s never too late to develop healthy credit habits and improve your credit health.
Read more: How to Build Credit from Scratch in Canada.
