It seems like everyone is talking about credit scores these days. That’s especially true in Canada today because about 71 percent of Canadian families are reported to have some type of debt. That could be a mortgage, loan for a vehicle, student debt, or other obligation.
Credit scores are one of the factors lenders will consider when looking at your financial situation. That could affect your ability to buy or lease a car, qualify for a mortgage, or get more advantageous loans. The better your credit score, the more financial flexibility you have.
But if you aren’t familiar with the system, how do you know if your credit score is good, bad, or somewhere in-between? And why does it matter? Let’s have a look at what is a good credit score in Canada and how you can make credit scores work for you.
What are credit scores and who creates them in Canada?
Your credit report summarizes your credit history, and that starts when you first borrow money or apply for credit. Information about your accounts is sent to Canada’s credit bureaus by your creditors such as banks, credit unions, retailers, and other lenders.
What is the credit score range in Canada?
The credit score range can be from 300 at the low end to 900 at the high point. The higher the score, the more easily you will qualify for financial products. Lenders are looking for borrowers who are less likely to default on loans based on their credit score.
As a general rule of thumb, here are the categories of credit scores and how they are ranked:
300 to 559 – Poor Credit Score; you will have difficulty getting approvals and face high interest for any loans
560 to 649 – Fair Credit Score; you might get approvals but be limited to secure credit options
650 to 724 – Good Credit Score; you are much more likely to get approvals and reasonable interest rates
725 to 759 – Very Good Credit Score; you will have preferred rates and more positive approvals
760+ – Excellent Credit Score; you’re in an elite category with maximum credit options.
What is the average Canadian credit score?
According to TransUnion, the average Canadian’s credit score is about 650. That level is considered good by lenders. And borrowers ranked at 650 will usually qualify for the financial products they need. However, it’s always better to have a higher credit score to get the best rates available and to have even more flexibility.
How do credit bureaus assess your credit score?
Credit bureaus base their calculations on several factors that include:
- Your credit history
- How long you’ve been using credit
- How much debt you’re currently carrying
- Whether you’ve made any late payments on loans or credit cards
- Whether you’ve maxed out the full amount of credit available or just a portion of it.
Examples of how credit bureaus make their assessment are available on both the TransUnion and Equifax websites.
What is a good credit score in Canada for a mortgage?
When applying for a mortgage, Canada’s mainstream financial institutions are looking for a credit score of between 600-700 or higher. However, your credit score is just one of the factors to be considered when applying for a mortgage. The lender will also look at your earning power and other obligations that might affect your ability to reliably make mortgage payments.
If your credit score falls below the target range there are other options available. Smaller institutions or lenders arranged through a mortgage broker can help you get a mortgage.
What credit score do you start off with?
At the outset, credit scores start at 300 and ideally move upward from there as you create your credit history over time. In today’s digital world, it’s virtually impossible to function without a credit card. Hotel reservations are held against a credit card. Buying items online requires a credit card. So even if you would prefer an all-cash lifestyle, that has become an impossibility in Canada today.
If you have no credit history or need to rebuild your credit, it would be smart to open a secured credit card account. Unlike unsecured cards, you pay a deposit upfront which sets the limit of your card. Then you can use it like any other credit card. The secured credit card provider reports your payment habits to the credit bureaus. Based on keeping your account in good standing by meeting re-payment requirements, you will create a positive credit history and build a higher credit score.
For young people, it’s sometimes challenging to start building a positive credit history. Some of the best steps are to open a bank account, get a credit card, and keep it in good standing. Making monthly payments in full (or at least the minimum payment) and landing a consistent job are also positives. Any missed payments will create a bad credit history. So, this is an important time to pay attention to your payment schedule.
How long does information stay on your credit report?
Positive information about your credit history can be kept on the account indefinitely. That’s good for your overall credit score. Negative information like payments missed or defaults on a loan can be kept on file for a specified period.
In general, negative information stays in your credit report for six years. However, some information may remain for a shorter or longer time span. That can simply be missed payments or more complex matters like accounts sent to a collection agency or a bankruptcy filing. Negative information in your credit report can hurt your credit score.
How long negative information stays on your report can vary depending on the type of financial information, where you are located (province/territory), and the credit bureau that created the report.
How long does it take to build credit?
There’s no shortcut to establishing your credit history and improving your credit score. Don’t fall for claims from dodgy companies that claim to be able to boost your score quickly. Only your direct creditors can update information on your credit file based on your activity.
How can I build my credit faster in Canada?
Pay bills on time every month
The most important way you can build a good credit score is to pay your bills on time each month and pay the bills in full. Creditors are looking for consistent, reliable payment that indicates you can manage credit responsibly. If you carry a credit card balance month-to-month, then be sure to at least pay the minimum on-time monthly. Even one missed payment can hurt your credit score.
If you are expecting a rebate for a returned item, don’t withhold payment to your credit card waiting for the rebate. You need to stay in good standing with the credit card company or retailer. They will credit your account when the rebate is received. But if you think, “I don’t need to pay that because it’s not a fair charge”, then you will be harming your credit score.
And don’t forget that these tips apply to all your bills, not just credit cards. If you have a cell phone plan and fall behind on payments, that will be reported and hurt your score. Track what you owe carefully and stay on top of payments.
If you’re worried you might forget to make payments on time, set up automatic payments from your bank account to alleviate stress.
Under extreme circumstances such as the coronavirus pandemic, if you know you won’t be able to make your regular payments contact your lender. It’s better to flag the problem up-front. Don’t wait until you have missed payments that will lower your credit score. Especially during exceptional times, lenders are open to making special arrangements and setting up deferred payments.
Don’t spend to the max
Here’s something many Canadians don’t realize. If your credit card balances are at the top of their limit and you’re just paying the minimum each month, that hurts your credit rating. Keeping your balances lower than what’s available will look better to credit bureaus. It’s advisable to keep balances at less than 50% of the credit card’s limit.
If you find yourself using money from one credit card to pay the minimum balance on other cards, that’s a warning sign that you are over-extended. Look at your overall financial situation and do what you can to pay down high-interest loans.
Don’t take on too much credit
This is a tough one. Many lenders promote holding their card and send ‘you have prequalified’ letters to prospective clients. Be careful because applying for numerous credit cards or other financial vehicles within a short space of time can be seen negatively by the credit bureaus. Every time a lender asks to check your credit or pull a report on your credit, that’s a ‘hit’ on your credit file. And too frequent checks can make it seem like there is a problem, making you a less attractive prospect.
What are the things that can damage my credit score?
Here is a summary of the things that can damage your credit score and which you should avoid:
- Too many credit applications
- Too many (or too few) open credit accounts
High credit card balances
High balances on loans
Late or missed payments
- Not making payments while disputing a charge
- Failing to advise your lender when payments are in jeopardy
Who can see and use your credit report?
In Canada, there are rules in place as to who can see your credit report and how that information can be used. As might be expected, companies including banks, credit unions, credit card companies, car leasing companies, and retailers can have access to your credit report. Some that may not be as obvious are mobile phone companies, insurance companies, government, employers, and landlords. If you have a mortgage or a home equity line of credit, that may also be tracked in your credit report. Mortgage information may be used by the credit bureau when calculating your credit score in Canada.
Your credit history can have an impact not only on activities like borrowing money or seeking a credit card limit increase. It can also impact your ability to rent an apartment, qualify for a promotion, or be considered for a new job.
Clearly, it’s wise to work towards having a positive credit score and to stay on top of your habits as a borrower.
How to check credit scores in Canada?
It’s important that information stored and shared by credit bureaus is accurate. Sometimes credit records from the past may not be cleared, such as when you pay off a car. To ensure that your current obligations are on file and accurate, you can request a credit score report from both Equifax Canada (called credit file disclosure) and TransUnion Canada (called consumer disclosure). Typically you can get a free credit score report in Canada once a month.
There is a fee associated with more frequent checks on your credit report. However, some banks are encouraging people to stay on top of their credit scores by providing a link to free credit score checks via the bank’s website. Now it’s easy to keep an eye on credit bureau reporting while you work towards a great rating.
When you request a credit report on your credit score there is no harm to your credit score, unlike when lenders check your file.
What to look for
Once you have access to your credit reports, check that your personal information is correct with both bureaus. Make sure the account information is up-to-date and accurate and that there are no ‘skeletons of credit past’ still hanging out on your file. If you discover mistakes on your account, you will need to contact the lender. If your creditors aren’t helpful you can file a dispute with the credit bureau directly.
Another benefit of keeping an eye on your credit reports is avoiding identity theft. Check to make sure that any queries on your account are yours and that someone else didn’t try to access credit cards or other loans under your name.
Because things can change over time as you take out new loans or pay things off, it is important to continue requesting a credit report at regular intervals – at a minimum once a year. Maybe this could become a tradition on a special occasion so that you remember. Happy Birthday to you – you’re maintaining a good credit score in Canada!