Credit Score In Canada, The Deal Breaker?

Last Updated on August 4, 2021 by Yetty Akindele

Given the unpredictable nature of the world, you never know when you might need to borrow money. To prepare for the uncertainty, you should try to maintain a strong credit score. Keeping a good credit score is an investment in your future. 

But, how does one maintain a good credit score?

In Canada, a good credit score isn’t just determined by paying your credit card bills on time. I’ve made an in-depth guide on everything you need to know about having a good credit score in Canada in this article.

I assure you, you’ll be thankful for this piece of advice one day! Especially if you are like me, a newcomer in Canada from a country where we have no credit card culture.

What Is A Credit Score?

Almost everyone has heard of credit scores, and you might even have checked out your score at some point in time. But the truth is, very few people actually know what they are and understand how they work. Credit scores are created by analyzing information from credit reports. The results are used to forecast how someone is likely to act in the future. This is in terms of their ability to pay back debt on time.

When you apply for credit, whether it is an auto loan, a credit card, or a mortgage, lenders are interested in knowing the risk they would be at by lending their money. This means that when they order a credit report, they can also ask for a credit score based on the information present in the report. A credit score can be used to analyze a credit report. It is seen as a number that summarizes credit risk based on credit reports at a certain point in time in your financial history. So, in simple terms – a credit score shows whether you can be trusted with a loan or not.

Why Does A Credit Score Matter In Canada?

In Canada, a credit score is a lot more important than you think. It predicts whether someone is likely to pay a new bill on time or can handle a credit line increase. Essentially, it informs lenders about your creditworthiness – the likelihood of you paying back a loan based on your credit history. 

Credit scores play a big role in deciding whether you’ll be able to get credit, and the terms (such as interest rate) lenders will offer you. For example, your credit score will affect the premium set by insurers on your home insurance or car insurance. Landlords also look at credit scores to decide who can rent their apartments. These scores also factor into who gets the best cell phone plans, and who needs to make larger deposits to receive utilities. 

With a good credit score, you can secure amazing deals for yourself – on apartments, cell phone plans, loans, insurance premiums, and credit cards. Solid credit history can make a huge difference for people of all ages. For example, Medicare doesn’t usually pay for extended stays at an assisted living center or a nursing home. These organizations rely on private payments. Thus, they run credit checks before admitting someone to ensure that the applicant is capable of paying the bill.

On the other hand, a bad credit score can lead to a lot of problems. If you find it hard to pay your bills on time, late fees will become the least of your worries. With a poor credit score, you will find it hard to take out loans and qualify for credit card accounts. Securing a loan with a bad credit score means a higher probability of paying an interest rate above the norm. Also, you may end up paying more for rent, homeowner’s insurance, or auto insurance compared to people with a decent credit score. Some employers run a credit check before offering jobs as well, especially for management positions, or jobs that involve the use and handling of money. This means that a poor credit score can get in the way of your employment too. So, a credit score can impact your life greatly. 

Credit scores are especially important when you’re applying for insurance. Insurers will also take a look at your credit reports. For example, some homeowners and renters use a proprietary credit-scoring system to decide your rates. Life insurance companies usually don’t use credit scores in the process of underwriting, but it might be more challenging to get a policy or get their best rates in case you have a poor credit score.

Luckily, there are a few ways through which you can fix a bad credit score. For example, while trying to rent a place, you can find someone to cosign or offer to pay a higher security deposit. You can also fix your credit score with the help of credit repair companies. 

What Is A Good Credit Score?

Credit scores range from 300 to 900 points, which is the highest score you can achieve. One of the biggest credit companies in the world, Transunion, has stated that 650 is the magic middle number. A score higher than 650 is likely to get you qualified for a standard loan. In contrast, a score below 650 will make it challenging for you to get credit. See below an image of credit score ranges and the rating classification according to Borrowell.

However, it is crucial to keep in mind that lenders looking at your credit bureau file might see slightly different numbers than you. This is because each creditor applies their own specific set of risk rules, adding and reducing points for various purposes or preferences. This proprietary method of scoring can impact their final calculation. Your own score uses an algorithm created for consumers, which is the approximation of these different formulas and is most likely in the same numerical range as the scores of your lenders. 

How To Check Your Credit Score?

There are many ways you can check your credit score in Canada. Below, I’ve listed the three most common ways that you can check your score!

Canadian Credit Bureaus

You can order your credit report from either of the two credit reporting agencies in Canada:

• Equifax
• Transunion

These bureaus provide people with one free credit report per year, when you make the request by mail, telephone, fax, or in-person. You can view your credit score more than once for a small fee.

Banks

You may be able to check your credit score through your bank as well. Usually, Canadian banks offer this service through their website or mobile app. However, the credit score your bank shows you may not be the same as the one they use to make lending decisions. So, keep that in mind!

Borrowell

Borrowell is an organization dedicated to helping people make good decisions regarding their credit score. They can also provide you with access to your Equifax credit score and credit report. It also provides you with the ERS 2.0 credit score free of cost – a legitimate and popular score used by several lenders and banks to determine their lending decisions. 

What Affects Your Credit Score?

Several factors determine your credit score. Most consumer reporting agencies tend to provide very limited information regarding how your credit score is calculated. They believe that this information is proprietary, and so they keep it a secret. But thankfully, they provide a list of a few main factors you can keep in mind.

Payment History

One such factor is payment history. This refers to whether you’ve paid your bills on time. Late payments or account sent to a collection agency can have a detrimental effect on your credit score. Delinquencies are a factor too. For instance, ifyou have been past record of misconduct, or are placed in public record or collection fields, your credit score is likely to be poor. The frequency and severity of derogatory credit information such as collections, bankruptcies, and charge-offs are what matter. 

Balance-to-limit Ratio

Another factor is the balance-to-limit ratio or utilization rate. A rate calculated by dividing all your credit card balances against your credit card limits. Generally, lenders view a ratio of 35% and below to be healthy. So, if you have a $10,000 credit limit, you should keep your balance below $3500. A high utilization rate indicates that you owe a lot of money on your credit cards. This can bring your credit scores down significantly.

Credit Inquiries

Recent credit inquiries are important, as well. There are 2 types of credit inquiries. The hard and the soft inquiry. An example of a hard inquiry occurs when a creditor looks into your credit history. If you have too many inquiries within a short period, it may indicate that you’re attempting to get credit due to financial problems, or that you’re overextending yourself by taking on more debt than you can actually handle. However, many inquiries don’t necessarily have to be an indication of financial problems, such as a background check when you’re renting a place. These are soft inquiries and do not impact your score. 

Account History

The length/history of your accounts also matters for your credit score. If you’ve only had your accounts for a short time, it can negatively impact your score and show you as a potentially risky borrower. So, you should think twice before deciding to close old accounts and open new ones right before applying for a loan. To sum it up, a long account history on your credit accounts is likely to lead you to a higher credit score. Moreover, a strong credit profile consists of a balanced combination of loans and credit account. However, having too many balance-carrying credit accounts is seen as an indicator of financial distress. So, the more accounts you have, the fewer the credit points you are likely to have. 

Bureau Reporting Errors

Similarly, certain “derogatory” factors may have a negative impact on your credit score. these are usually not mentioned by Credit Bureaus. One such factor is bureau reporting errors. These can be delinquent accounts on your file that aren’t yours, late payments that were actually made on time, or credit created through identity fraud. This means you end up with a low score through no fault of your own. Luckily, you can easily fix these yourself or with the help of a credit repair company.

Other Factors

Your residence can affect your credit score too. If you move around a lot, it may be reflected in a lower credit score. The longer you stay at one address, the more credit points you receive. How long you’ve had a certain job is another factor too. The longer you’ve been at your current job, the higher your credit score will be. If you’re seen as having a secure and stable job, you’re likely to be seen as someone who sticks to their commitments.

How Can You Raise Your Credit Score?

There are a couple of things you can do to raise your credit score. First, you can correct the errors in your credit report, and you can also make sure to track your report for future mistakes.

You should order your credit file from each bureau at least once a year, and try to lower your balances. In case your debt levels are above 50% of your available credit limit, you should work on a payment plan for the reduction of your balances. 

One of the most helpful tips to keep in mind for having a solid credit rating is to consistently pay your credit bills on time. You should also look into setting up an automated payment system to help you. This will prevent you from forgetting to make payments for the balance due.

Another option you can look into is opening a secured credit card account. For this, you need to pay a deposit, which establishes the limit of your card, and then you can use it as a normal credit card. The credit card provider will report your payment practices to the bureaus. As a result, you will be able to obtain points through this account. You should also look over your credit report and identify which areas can be worked particularly to improve your credit score. 

Conclusion

To sum it all up, it’s essential to check your credit report every year to assess what your credit score is and work on anything if needed. There is also a lot you can gain from receiving advice from organizations such as Borrowell. They can give you the guidance necessary to help you achieve a strong credit score. 

A good credit score is a worthwhile investment to make as it can provide you with lifetime benefits. It isn’t just about the pros; think about all of the cons you will manage to avoid too. Best of luck and spend wisely!

Click here to get your free Equifax credit score

Click here to get your free Transunion credit score