Credit Scores & Credit Reports in Canada: Basics For BeginnersNovember 29, 2021
Confused about credit, credit reports, and credit scores? Don’t worry, you’re not the only one.
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Roughly 7 in 10 Canadians don’t know their current credit score and 4 in 10 say they don’t even want to know what it is, 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 you’re approved 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 pay it back 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 of the ways lenders assess how much they trust a certain borrower is by looking at that borrower’s credit score.
You’ve probably heard the phrases “bad credit” or “good credit” before. These are general terms that broadly refer to a person’s credit score. If you have good credit, it means lenders will have more trust in you to repay a loan, and therefore they’ll be more likely to approve your application for a loan. If you have bad credit, it means you might have a hard time getting approved for loans, even something small like a new cell phone.
People with good credit tend to get approved for lower interest rates compared to those with bad credit. This is because there is a higher likelihood for default with bad credit borrowers, and lenders offset their financial risk with increased interest rates.
The good news is, with the right behaviours, Canadians with bad credit are able to 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 (like your name, Social Insurance Number, and address) as well as the 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 on 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 ever been late with payments, and more.
Your credit score is calculated based on the information in your credit report.
What are credit bureaus?
Credit bureaus collect and keep track of the credit ratings and histories of individuals. There are two credit bureaus in Canada—Equifax and TransUnion. Each company has slightly different ways that they calculate a credit score, but they’re mostly the same. The credit scores calculated by these bureaus are then made available to lenders when they’re assessing loan applications.
What is a credit score?
A credit score is a number between 0 and 900 that has been calculated by a credit bureau. Its purpose is to grade the likelihood of an individual to pay their bills on time. The higher the number, the more trustworthy an individual looks to potential lenders.
Credit scores are calculated based on a number of 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 long pattern of bills paid on time, 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 it comes to 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.
What causes my credit score to drop?
If you’ve already 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 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 a number of “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.
Do I have a credit score and not know it?
The vast majority of Canadians don’t know what their credit score is but it’s a good idea to check it every so often.
- It will give you a good idea of what to expect in terms of 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 a few different ways to request your report and only some of them 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.
Read more: How To Build Credit from Scratch in Canada