Your credit score is important if you ever need to take out a loan, mortgage or credit card, as it will impact whether the loan is approved and the kind of interest rate you’ll be offered.
But how does a credit score work, and what is a “good” credit score? Why is a credit score so important, and how can you improve your credit score? In this article, we’ll answer all these questions, as well as more of the most common credit score FAQs.
Making sense of credit scores in Canada
The majority of credit reports and credit scores in Canada are managed by two private credit bureaus: Equifax Canada and TransUnion Canada. They set up credit reports on Canadians when they borrow money or apply for credit for the first time (with information supplied by lenders).
From this report and the way you manage debt, the credit bureaus create your credit score. This score is meant to reflect how well you manage debt and how big of a risk you will be to a lender (that is, how likely you are to default on a loan). Equifax and TransUnion have slightly different ways of calculating your credit score, so you shouldn’t be surprised if your scores differ between the two.
Credit scores range from 300 to 900. What qualifies as a good or a very good score will depend on the lender, but in general, any score below 580 is considered poor. Fair scores are above 580 while good and very good scores are above 670. Any score above 800 is considered excellent.
According to TransUnion, the average credit score in Canada is 650 (which is at the higher end of the fair range). Around 20% of Canadians have a score below 600, meaning that many of them would be considered to have poor credit and therefore a risk to lenders.
Credit score rankings
Credit scores range from 300 to 900. Here are how scores align with their ranking, according to Equifax Canada:
300-579 poor
580-669 fair
670-739 good
740-799 very good
800+ excellent
How does a credit score work in Canada?
Several aspects of your financial life are included in your credit report and credit score. Banks, credit unions, credit card companies and other financing companies send information to Equifax and TransUnion. This credit score could then be referred to by lenders, car leasing, mobile phone and insurance companies, landlords and even some employers.
On the whole, you do have to give permission to allow a company or landlord to carry out a credit check on you (although in PEI, Nova Scotia and Saskatchewan, they only need to tell you that they’re checking your score).
Several types of behaviour can harm your credit score, including:
- Missing a payment on a loan, mortgage, credit card or mobile phone.
- Owing a large percentage of your available credit (typically, over 30% can have an impact).
- Declaring bankruptcy.
- Having a consumer proposal.
- Having a debt that’s gone to a collection agency.
- Whenever a lender pulls your credit report.
- Fraud alerts on your account.
- Having a short history of borrowing money.
- Having very few or many loans or credit cards.
Declaring bankruptcy or having a consumer proposal will severely affect your credit score and you will probably find it extremely difficult to get a loan or other credit for several years afterwards. Ironically, if you don’t borrow money, you won’t have a credit history and therefore probably won’t have a credit score at all.
Why is a credit score important?
One of the main ironies of your credit score is that the better you manage your credit, the better your score is and the better the interest rates you qualify for are. The worse you manage your credit, the more expensive loans become, making it more difficult to manage your credit.
Your credit score could have an impact on:
- Getting a loan.
- Buying a home.
- Getting a low interest rate on a loan.
- Having more financial options available to you.
- Finding an apartment to rent.
- Getting a job.
If you have a poor credit score, getting a mortgage could be very difficult; you may have to go with a “B lender”, which would charge a higher interest rate than the average. Similarly, securing a loan at a good interest rate could be difficult and you may struggle to sign up for a new credit card.
A low credit score will also make renting a new property more difficult. Landlords want to know that you’re able to pay your rent promptly and are unlikely to become a problem tenant. If you have a low credit score, they’ll be more likely to rent the place out to someone with better credit.
From a financial planning point of view, having a low credit score can limit your borrowing options. Certain types of loans, such as mortgages and home equity lines of credit, can be really useful in helping you to reach your long-term financial goals. A poor or even fair credit score can put these options out of reach, making it far more difficult to reach those financial goals in good time.
Having a poor credit score can also limit your employment opportunities. Some employers insist on pulling your credit score before offering you a job. This is particularly likely if you’re applying for a role in the financial services sector; they will want to see that you are capable of not only managing your own money but also that you’re not in a position where you might be open to bribery.
Federal government employees are also required to have credit checks before their job offer is made. The idea behind this is that if a job candidate has a large amount of debt, they might be more open to committing unethical acts and pose a security risk.
How to improve your credit score in Canada
If you find that you have a poor or fair credit score that you want to improve, there are several strategies that can drive up your score fairly quickly.
Keep track of your credit score regularly: it pays to check your credit score often, as mistakes do happen. For example, a loan that you thought was paid off might still have a small amount remaining on it. This could lead to several months of non-payment, which would have a considerable negative impact on your score. Fraudulent behaviour can also impact your score.
By regularly checking in on your credit report, you can correct any mistakes and issues before they start to damage your credit score.
Make paying debts on time a priority: managing your debt well is one of the most efficient ways of improving your credit score. Setting up automatic payments can be really helpful in ensuring you never miss a payment.
Keep your credit balances low: nothing suggests that you’re a risky borrower more than if you max out all of your credit cards. Try to keep balances below 30% of the credit limit to prevent a negative impact on your credit score. You can ask your credit card company to increase your credit limit, so the percentage of money owed is smaller.
Have several types of credit open: a variety of credit can positively impact your credit score. Having two or more of a mortgage, an instalment loan, a credit card or a cell phone account, and having them all in good standing, can boost your credit score significantly.
Keep old loans open: the longer you have a credit card, the more it will increase your credit score.
Open a secured credit card account: this can really help if your credit score is so poor that you can’t qualify for a regular credit card. While you have to pay a deposit to use the card, you still have to manage it as you would a regular credit card. If you manage this account well, it will help improve your credit score.
Don’t bring about too many credit checks all at once: if you apply for several credit cards at once, it suggests that you’re in desperate need of money and therefore a financial risk. Apply for one credit card at a time and try to stretch out the period of time between credit checks.
Consider taking out a debt consolidation loan: if you have several high credit card balances, it could make sense to pay them off with one loan. Not only will this potentially reduce the amount of interest you’re paying, but it will also make managing debt easier and reduce the number of high-balance loans that you’re carrying, which will improve your credit score.
Credit score FAQs
Will checking your credit score make it worse?
Checking your own credit score is known as a soft credit check (or soft inquiry), and this will not impact your credit score.
Will losing my job lower my credit score?
Not directly; your job status isn’t shown on your credit report. However, losing your job could make it difficult to make all of your debt payments on time, which in turn would lower your credit score.
What is a good credit score?
Any score above 670 is considered good, but the best borrowing opportunities (for example, mortgages with the lowest interest rates) are typically only available to people with credit scores above 740 or so.
Will a good credit score guarantee that I get a loan?
Not necessarily. You will typically also have to show that you can afford the loan, so your income and other debt obligations will normally be taken into account before you’re approved.
How can I check my credit score?
You can order a free credit report in Canada from TransUnion and Equifax once per year. You can also check your credit score with companies like Credit Karma and Borrowell, also for free.
Will bankruptcy permanently ruin my credit score?
While bankruptcy and a consumer proposal can severely damage your credit score, neither will damage it forever. Once the proposal or bankruptcy is discharged, it remains on your credit report for several years (the length of time depends on your home province) but is eventually stricken from the record.
Will my spouse’s credit score affect mine?
If your spouse has a poor credit score, this won’t affect your own score. However, if you have a jointly signed loan that has late payments, this will affect your credit score as if it were just your loan. Your spouse’s poor credit score may also affect you as a couple, insofar as it would be more difficult to get approved for joint loans, such as a mortgage.
How do I dispute my credit score?
If you feel that there is an error in your credit report (which is negatively affecting your credit score), you would need to contact either TransUnion or Equifax directly.
How to get help improving your credit score
Your IG Advisor can help you to improve your cash flow by adopting better money management habits. They can help you set up a budget that you can stick to and improve your debt management, so you regularly pay your debts on time. This in turn will boost your credit score fairly quickly.
Talk to your IG Advisor today about improving your credit score. If you don’t have an IG Advisor you can find one here.
Written and published by IG Wealth Management as a general source of information only. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on your specific circumstances from an IG Wealth Management Consultant
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