Credit score: what to remember

  • A credit score is a 3-digit number between 300 and 900 indicating your solvency and your ability to repay a loan.
  • Your credit rating is key when applying for credit. The higher it is, the more disciplined you are considered to be and the better the proposal and the interest rate will be.
  • A credit rating is not static over time, it can go down or up.
  • Two agencies, Equifax and TransUnion, make up credit scores. These agencies sell this data to the many companies and institutions that request it.

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What is a credit score?

A credit rating, also known as a credit score or credit score, is a three-digit number that assesses your credit history and creditworthiness. A credit score changes over time, and nothing is set in stone:

  • you earn points on your credit rating if you use your credit responsibly
  • you lose money if you go into excessive debt, fail to repay your credit within the time limits, etc.

In Canada, credit rating is assessed by two major credit bureaus: Equifax and TransUnion.

These are private companies that collect and report information about your credit habits. However, other private financial institutions have their credit rating systems.

Your credit score is created along with your credit report when you first borrow money and your lender submits your information to reporting agencies.

What is a credit score for?

A credit score allows the various financial institutions in Canada to assess in a few seconds the level of risk of a creditor and his ability to repay a loan granted.

Many institutions consult your credit report, including:

  • banks of course before granting you a personal loan, mortgage, or credit card
  • car rental companies
  • phone companies, before you sign up for a phone plan
  • insurance companies,
  • your future employer,
  • your future owner etc.

It is therefore essential to take care of your credit rating and to be careful to maintain your rating above 600 so as not to send the wrong signals and find yourself in an uncomfortable situation, such as the impossibility of renting accommodation.

You usually need to permit a lender or other company to view your credit report. However, not giving this authorization may simply prevent you from taking out any credit.

How is the credit score calculated?

The credit rating is calculated using a mathematical formula that establishes your level of risk after a detailed analysis of your file. Among the elements used to calculate your credit score, we find the following elements:

  • the maturity of your credits
  • the age of each loan in your file
  • carrying forward balances on your credit cards
  • your current outstanding debts
  • non-payment of some of your debts on time
  • the use of your credit limit
  • the number of credit applications you have made recently
  • the type of credit used
  • transferring your debts to a collection agency
  • the presence of an insolvency or bankruptcy file in your file.

However, keep in mind that the calculation of the credit rating varies from one financial institution to another. Indeed, according to their different guidelines, they will give more weight to certain information than to others. Most often, your payment habits and your use of available credit are the two factors that affect your credit score the most.

What do the different credit scores mean?

Credit scores range from 300 to 900. A credit score of 600 is considered average and reasonable.

Below is a summary table of the different credit score scales calculated by Equifax:

ScaleCanadian populationEvaluationOur advice

300-559 4% Weak Take the necessary actions to improve your credit rating (example: subscribe to a program to improve your credit rating).

560-659 10% Medium Demonstrate your sense of financial responsibility with your debt repayment history.

660-724 15% Good Maintain your strong credit history to improve your credit profile.

725-759 14% Very good Continue with your excellent financial habits to maintain your credit rating.

760-900 57% Excellent Continue with your excellent financial habits to maintain your credit rating.

Credit Scores: Numbers & Meanings

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What is a good credit rating?

An acceptable credit score is between 600 and 670. It is generally accepted that the higher your credit score, the better. If your credit score is above 800, this will be an excellent signal for financial institutions. It will simply mean that the risk that you do not honor your financial commitments is very low. You will therefore have access to credit quickly, and easily and benefit from much better interest rates.

What can influence a credit rating?

Your credit rating is not static. It changes over time, depending on your financial habits. Several factors can influence your credit score:

  • your payment habits: the more you pay your debts when due, the better your credit rating will be.
  • your use of available credit: to have a good credit rating, it is better not to use all of your available limits on your credit card.
  • the date your account was opened: your credit rating is improved if you have had an account that has been open for several years
  • a variety of accounts and receivables in your name: the more variety of accounts you have in your name, the better your credit rating will be.
  • the number of credit applications you make with financial institutions: the fewer new applications you have, the better your credit rating will be.

What can lower a credit score?

Certain elements of your financial history can lower your credit rating, such as:

  • payment delays and defaults
  • using your available credit up to or over its limit
  • bankruptcies and over-indebtedness
  • the existence of numerous recent credit applications in your file.

A declining credit score sends signals like:

  • you live beyond your means
  • you are in a financial bind.

How to increase your credit rating?

You can take several concrete actions to improve your credit rating. However, count which months of good practice to see your credit rating go up from the moment you start trying to raise your score.

Subscribe to a program to improve your credit rating

Signing up for a program to improve your credit score can be useful to get help from a financial institution to manage your finances, and help you save and pay on time. Koho, for example, offers this kind of program for $7/month. You can also opt for a pre-paid card, which helps you not to exceed your limit.

Ask for your credit file

This is the first step to seeing your credit report as it stands. You will be able to see what aspects you need to correct to improve your credit rating and this will show the financial institutions that you are taking your file in hand. Your requests to consult your credit rating are visible on your credit report but have no impact on it. You can send several requests to consult your credit rating per year, by letter, free of charge.

Improve your payment history 

Always make your payments on time. If you are unable to pay these on time, negotiate a schedule with the lender. Reduce your expenses to reduce your debt ratio.

Use your credit wisely 

Never exceed the preset limit on your credit card. One of the recommended best practices is to use between 30 and 35% maximum of your available limit. For example, if your limit on your credit card is $300, you should use between $900 and $1050.

To calculate your credit limit, you must take into account all the limits you have on all your credit products. These include credit cards, lines of credit, and loans. 

So, for example, if you have a limit of $3,000 on your credit card and a line of credit of $12,000, you will have a credit limit of $15,000. You will thus have to use between 30 and 35% of this limit, that is to say between CAD 4500 and $5250.

Increase the duration of your accounts 

If you maintain a credit account for a relatively long period, your credit rating will be positively impacted. It will therefore be advisable to keep your credit accounts, even if they are unused. Keep in mind that recent account openings penalize your credit rating. Thus, the transfer from an old account to a new account is considered a new credit.

Limit your credit requests

It is quite normal to use credit from time to time to make large purchases such as a car or an apartment. However, if you apply for credit too often, lenders will think you are living beyond your means. They will thus deduce that you are financially irresponsible and this will affect your credit rating. As a result, a reduction in your credit inquiries will help improve your credit rating.

Use different types of credit

Do not limit yourself to a single credit product, such as a credit card, as this negatively impacts your credit rating. Consider diversifying your credit products. For example, you can improve your credit rating if you have a credit card, car loan, and line of credit. Just be sure to be able to repay your loans in any case.

Sign up for a program to help boost your credit rating

Some financial institutions offer programs to help you improve your credit rating for a few dollars a month. How does it work?

When you register, your bank puts a certain amount in a separate account and takes part of it each month to save. Then she sends this action to Transunion or Equifax so that they take note of it.

Using your debit card has no impact on your credit rating since, by definition, with a debit card you only use the money you already have.

How to know your credit score?

In Canada, you have the right to obtain a copy of your credit score free of charge and several times a year, if you request it in writing. Don’t worry, these requests, even repeated ones, are mentioned in your credit report but have no impact on your credit rating.

Otherwise, here are the different ways to know your credit score:

Credit Verify to check your credit rating in Canada

Credit Verify allows you to quickly know your credit rating you can instantly consult your rating. You will also be able to benefit from adapted advice if you want to know how to improve it. In addition, you can quickly check that your file contains no errors, these errors can indeed lower your credit rating.

By Cary Grant

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