The topic of credit can be a confusing one. From accessing your credit report to understanding how it is calculated, it can be difficult to move forward and repair bruised credit without knowing what is causing your low credit score in the first place.
So, to help you better understand your credit score, we’ve answered some of the most common questions about credit scores and credit reports and provided some tips for maintaining or improving your credit.
Download Guide (PDF)Answers to Common Questions about Credit Scores
The topic of credit can be a confusing one. From accessing your credit report to understanding how it is calculated, it can be difficult to move forward and repair bruised credit without knowing what is causing your low credit score in the first place.
So, to help you better understand your credit score, we’ve answered some of the most common questions about credit scores and credit reports and provided some tips for maintaining or improving your credit.
Download Guide (PDF)What Does Credit Mean in Canada?
Credit refers to your level of financial risk for potential lenders—the risk of not paying back a loan or credit card. Your credit is represented as a number between 300 and 900.
Your credit score is based on your financial history, including your financial behaviour, and it reflects how financially responsible you are.
In the eyes of lenders, someone with good credit is more likely to pay their bills on time. Whereas someone with poor credit is more of a risk since they have a history of late payments or defaulting on their loans.
Those with good credit can easily get approved for credit cards and loans. And those with poor credit will have to build up their credit to have more financial freedom.
How Is Credit Tracked and How Can You Access Your Credit Report?
Credit bureaus, also known as consumer reporting agencies, keep track of consumer credit information in the form of credit reports.
Credit bureaus receive all the information from consumers’ credit accounts to create credit reports or files.
This information includes:
- Balances
- Credit limits
- Payment history
- Name, address, date of birth
- Social insurance number
- Marital status (and spouse’s name/age, if applicable)
- Number of dependents
- Occupation
- Employment history
You can order your credit report for free from one of
Canada’s credit reporting agencies-Equifax or TransUnion.
What Does Credit Mean in Canada?
Credit refers to your level of financial risk for potential lenders—the risk of not paying back a loan or credit card. Your credit is represented as a number between 300 and 900.
Your credit score is based on your financial history, including your financial behaviour, and it reflects how financially responsible you are.
In the eyes of lenders, someone with good credit is more likely to pay their bills on time. Whereas someone with poor credit is more of a risk since they have a history of late payments or defaulting on their loans.
Those with good credit can easily get approved for credit cards and loans. And those with poor credit will have to build up their credit to have more financial freedom.
How Is Credit Tracked and How Can You Access Your Credit Report?
Credit bureaus, also known as consumer reporting agencies, keep track of consumer credit information in the form of credit reports.
Credit bureaus receive all the information from consumers’ credit accounts to create credit reports or files.
This information includes:
- Balances
- Credit limits
- Payment history
- Name, address, date of birth
- Social insurance number
- Marital status (and spouse’s name/age, if applicable)
- Number of dependents
- Occupation
- Employment history
You can order your credit report for free from one of
Canada’s credit reporting agencies-Equifax or TransUnion.
What Is Considered A ‘Good’ Credit Score?
Credit scores range from 300 to 900 points in Canada. While 900 is the best possible credit score, a score of 650 is considered good and your likelihood of being approved for a loan is still strong with this rating. Having a credit score below 650 can affect your ability to qualify for new credit, however, this isn’t always the case. For instance, mortgage default insurers tend to prefer a credit score of at least 620 but are often willing to make exceptions for scores that are below this.
How Is Credit Calculated?
A credit score is calculated with numerical weights placed on various factors in your credit file. These factors are based on your credit history and payment behaviour.
The most important factor for your credit score is your payment history, as it makes up 35% of your overall score.
1. Payment History-35%
Your credit history includes a record of paying bills, both late and on- time—including loans, credit cards, and utility bills.
Paying bills on time consistently will boost your credit score, whereas late payments or having an account sent to a collection agency will lower your credit score.
2. Delinquencies-10%
The number of and severity of delinquencies on a credit report can seriously affect a credit score. Delinquencies include defaulting on loans, having accounts sent to collections, and a history of bankruptcy.
3. Recent Inquiries-10%
When you apply for new credit, the lender will do a credit check (inquiry), and this will appear on your credit report. Frequent and recent inquiries can hurt your credit score because they can be seen as a red flag to lenders.
If you recently applied for new credit, you might be seen as in financial trouble and less likely to make payments on time.
4. Balance-to-Limit Ratio-30%
Maxed-out credit cards or credit accounts with balances close to the limit (more than 50% of the limit) will harm credit scores. So aim to keep your account balances low on your credit accounts—ideally below 30 to 75% of your limit.
5. Length & History of Accounts-15%
Since good credit history is built over me, having a long credit account history helps boost credit scores. An account that has been open for a long time makes you appear as less of a risk to lenders than having a new account that was recently opened.
6. Variety of Accounts
Having a mix of credit products—car loan, credit cards, line of credit, etc.—can add points to your credit score because it shows that you are financially responsible and can manage a variety of credit accounts.
While having different types of accounts is good for your credit, having too many accounts—e.g. too many credit cards—can hurt your credit, especially if they carry balances. Too many accounts can be a sign of financial trouble.
Unlike the other factors listed above, there is no percentage to indicate how much weight credit variety has on your credit score.
What Is Considered A ‘Good’ Credit Score?
Credit scores range from 300 to 900 points in Canada. While 900 is the best possible credit score, a score of 650 is considered good and your likelihood of being approved for a loan is still strong with this rating. Having a credit score below 650 can affect your ability to qualify for new credit, however, this isn’t always the case. For instance, mortgage default insurers tend to prefer a credit score of at least 620 but are often willing to make exceptions for scores that are below this.
How Is Credit Calculated?
A credit score is calculated with numerical weights placed on various factors in your credit file. These factors are based on your credit history and payment behaviour.
The most important factor for your credit score is your payment history, as it makes up 35% of your overall score.
1. Payment History-35%
Your credit history includes a record of paying bills, both late and on- time—including loans, credit cards, and utility bills.
Paying bills on time consistently will boost your credit score, whereas late payments or having an account sent to a collection agency will lower your credit score.
2. Delinquencies-10%
The number of and severity of delinquencies on a credit report can seriously affect a credit score. Delinquencies include defaulting on loans, having accounts sent to collections, and a history of bankruptcy.
3. Recent Inquiries-10%
When you apply for new credit, the lender will do a credit check (inquiry), and this will appear on your credit report. Frequent and recent inquiries can hurt your credit score because they can be seen as a red flag to lenders.
If you recently applied for new credit, you might be seen as in financial trouble and less likely to make payments on time.
4. Balance-to-Limit Ratio-30%
Maxed-out credit cards or credit accounts with balances close to the limit (more than 50% of the limit) will harm credit scores. So aim to keep your account balances low on your credit accounts—ideally below 30 to 75% of your limit.
5. Length & History of Accounts-15%
Since good credit history is built over me, having a long credit account history helps boost credit scores. An account that has been open for a long time makes you appear as less of a risk to lenders than having a new account that was recently opened.
6. Variety of Accounts
Having a mix of credit products—car loan, credit cards, line of credit, etc.—can add points to your credit score because it shows that you are financially responsible and can manage a variety of credit accounts.
While having different types of accounts is good for your credit, having too many accounts—e.g. too many credit cards—can hurt your credit, especially if they carry balances. Too many accounts can be a sign of financial trouble.
Unlike the other factors listed above, there is no percentage to indicate how much weight credit variety has on your credit score.
Can A Low Credit Score Be Harmful?
A low credit score can prevent you from having certain financial, employment, and lifestyle opportunities. Lenders, insurers, landlords, employers, and utility companies can review your credit score and credit behaviour.
So, if you have a low credit score, they may see you as too much of a risk and reject your application for jobs, loans, rentals, or insurance.
A low credit score can affect:
Job Applications
Some employers might ask for permission to check your credit when you apply for jobs. And if you have a poor credit history, they might decide not to hire you.
Loan Applications
When you apply for more credit—credit cards, car loans, mortgages, etc.—lenders will look at your credit score and history to determine your creditworthiness. With a low credit score and poor repayment history, you will be considered a high risk to lenders since you might not make payments on me or you might default on your loan.
If the lender decides to approve your loan application, a low credit score will impact the credit limit and interest rate of your loan—the lower your credit score, the lower the credit limit and the higher the interest rate will be.
Housing Applications
Landlords will often check credit reports to see if applicants are at risk of missing rent payments. If you have a history of paying bills late or defaulting on payments, a landlord might reject your rental application and choose a tenant who has a better credit history.
Car Rental Applications
Car rental companies can also check your credit report to see if they are at risk when lending you their property.
Can A Low Credit Score Be Harmful?
A low credit score can prevent you from having certain financial, employment, and lifestyle opportunities. Lenders, insurers, landlords, employers, and utility companies can review your credit score and credit behaviour.
So, if you have a low credit score, they may see you as too much of a risk and reject your application for jobs, loans, rentals, or insurance.
A low credit score can affect:
Job Applications
Some employers might ask for permission to check your credit when you apply for jobs. And if you have a poor credit history, they might decide not to hire you.
Loan Applications
When you apply for more credit—credit cards, car loans, mortgages, etc.—lenders will look at your credit score and history to determine your creditworthiness. With a low credit score and poor repayment history, you will be considered a high risk to lenders since you might not make payments on me or you might default on your loan.
If the lender decides to approve your loan application, a low credit score will impact the credit limit and interest rate of your loan—the lower your credit score, the lower the credit limit and the higher the interest rate will be.
Housing Applications
Landlords will often check credit reports to see if applicants are at risk of missing rent payments. If you have a history of paying bills late or defaulting on payments, a landlord might reject your rental application and choose a tenant who has a better credit history.
Car Rental Applications
Car rental companies can also check your credit report to see if they are at risk when lending you their property.
How Can You Work Towards Improving Your Credit Score?
Though it will take some time, there are various ways you can improve your credit score, including:
Pay Off Debt
Start paying off your debt, especially high-interest accounts with high balances. Lowering your high account balances will help improve your balance-to- limit ratio.
Avoid Late or Missed Debt Payments
Paying bills on time every month will help improve your credit score. So avoid missing payments, as a late or missed payment will hurt your credit.
Get a Secured Credit Card
A secured credit card is for those who have no credit history or who need to rebuild credit. To open a secured credit card account, you will pay a deposit, which sets the limit for your account. You can use it like a regular credit card, making regular payments on time, and your credit behaviour will be sent to the credit bureaus to gain points on your credit score. Our recommendation is the Home Trust Secured Credit Card.
Correct Credit Report Errors
If you notice any errors on your credit report, contact the credit bureau so they can verify and remove any errors on your credit report. Common errors include:
- Wrong mailing address
- Wrong social insurance number
- Late payments
- Unauthorized credit inquiries
- Errors in your credit accounts
- Signs of identity theft
Don’t Close Old Accounts
The longer you have an account open, the better it is for your credit. So, even if you don’t use old credit accounts anymore, keep these old accounts open instead of closing them to help your credit score.
Boost Your Credit Utilization Ratio
Keep using your credit and paying it off on time to improve your credit score.
Debt Consolidation
You can consolidate all of your high-interest debts into a single manageable monthly payment to help pay down the principal amounts faster and improve your credit score.
Obtain a Home Equity Loan to Pay Off Debt
Tapping into your home equity to pay off high- interest debt is another way to pay off debt faster and improve your credit score.
The Takeaway
Though credit is complex, with many factors that influence credit score, there are ways to build your credit over time. So, don’t let a low credit score get in the way of achieving your financial freedom. With a bit of work, time, and patience, you can build your credit score and enjoy the many benefits of having strong credit.
Contact Chris Allard Today