Credit score in Canada – What you need to know

It is important to know how your financial transactions affect your credit history and credit score in Canada. You will need to build your credit history in Canada even if you’ve already built one in a foreign country. This is because a foreign credit history would not apply in Canada.

Do not feel overwhelmed if you’re wondering where to start on your credit score and history, here’s what you need to know about a credit report and credit score in Canada.

What is a credit score?

A credit score is a numerical value that depicts your credit risk, that is, your ability to pay back your financial obligations such as loans.

Credit scores in Canada are usually between 300 to 900. A score of 300 is the lowest and indicates the highest credit risk profile, on the other hand the highest score of 900 indicates the least credit risk profile.

You stand a higher chance of getting approved for a loan or mortgage if you have a credit score closer to 900. Lenders may be reluctant to offer you credit if you have a credit score closer to 300. An average score of 650 is often perceived to be average.

A lower credit score in Canada reduces your chances of getting approved for a loan, rental, or mortgage. It also increases the interest rates lenders offer on your credit based on your perceived risky profile and low creditworthiness.

What is a credit report?

Your credit score is derived from your credit report, which is a piece of detailed information about your credit history.

A credit report contains information about your credit accounts, credit ratings, lenders, or organizations who have done a hard check on your credit reports and other relevant information. This cumulative information is used to calculate your credit score, the report itself does not include your actual credit score.

You would need to check your credit score separately from your credit report.

A credit report contains information on credit history for up to the most current 6 years. It is important to check your credit report at least once a year to track your credit history. This helps you identify any errors or fraudulent activities on your account and/or identity.

How to check your credit report and credit score in Canada

There are several ways to obtain your credit report and credit score in Canada. You can check your credit report through:

Credit Bureaus

The two national credit bureaus in Canada, Equifax, and TransUnion provide credit reports and credit scores. These two agencies obtain credit and financial information from financial institutions and other lenders. The credit bureaus use different information and models to build your credit report and produce a credit score.

You can obtain a credit report, also known as consumer disclosure, from Equifax or TransUnion for free via phone, online, fax, mail, or in-person. Find details on how to request your free credit report from Equifax here and from TransUnion here.

You can check your credit score from both agencies for a fee via mail, online or in-person.

Usually, the credit scores obtained from both credit agencies may differ. This difference is often due to varying scoring models and information used by the different agencies to produce a credit score in Canada.

If your credit scores differ significantly, you may need to follow up with your credit report to ensure no errors are involved. You also need to be vigilant to ensure there haven’t been any fraudulent activities with your identity.

Financial Institutions

Some financial institutions, collaborate with the national credit bureaus to provide a free service for checking your credit score through their online banking or mobile app.

The score obtained through your banking institution educates you on your credit rating and may differ from what is being provided directly from the credit agencies to lenders.

Other organizations like Borrowell provide free credit scores.

Factors that affect your credit score

Some factors that may impact your credit score include:

Payment history

Your payment history affects your creditworthiness, it is one of the most important factors that affect your credit score in Canada. Your payment history shows how well you pay off your credit balances.

If you are late in making loan repayments, this will drive down your credit score. Your payment history includes all your credit agreements such as phone bills, car loans, credit cards, etc. but excludes your mortgage.

If you pay your debt when they become due, this indicates that you are financially capable of meeting your financial obligations. Your payment history captures the length and frequency of any delayed payments and this information is used to determine your credit score.

Credit utilization

Credit utilization measures how you use your available credit and evaluates your credit balance to its limit. It is generally advised that your available balance, the amount you have used and still owe by the end of a credit statement period, should be at most 30%- 35%.

The closer your credit balance to the limit, the more negatively it affects your score. For example, if you have a total credit limit of $1,000 and you have a balance of $950 due, there is a high chance of your credit score balance getting lower.

Credit checks

Some credit checks on your account may affect your credit score. If the credit checks are hard checks, they may indicate new applications for loans or credit accounts. This in turn signifies more debt and more risk hence causing a lower credit score.

Soft checks usually done by yourself or other organizations do not affect your credit score.

Credit accounts

Your credit score in Canada takes into consideration the number of credit accounts you have and also the mix of the types of credit accounts. Different credit accounts include mortgages, loans, credit cards, etc.

Having a mix of credit accounts can be beneficial, here’s how. If you have multiple credit accounts that are well managed, and repayments are made on time, it shows that you are capable of managing credit responsibly and paying off your debt.

Opening too many new credit accounts may spur a signal of having too much debt and this increases your credit risk thus resultingOing to a lower credit score in Canada.

Credit history length

A credit account held for a longer period provides a longer credit history trail and an account managed responsibly helps boost your credit score. Newer accounts with limited history may lead to lower credit scores as they affect your average account age.

Bad financial records

If you have had to file for bankruptcy or had any foreclosures, delinquencies, etc reported to the credit agencies, this would have a negative effect on your credit score.

Ways to improve your credit score

It is important to have a good credit score in Canada. Financial institutions, lenders, and other organizations use this score to determine whether to grant you credit, service, or product on installment payments, a rental agreement, or even a job.

Simple ways to build and maintain a good credit score in Canada include:

• Always make payments on time.
• Avoid opening too many credit accounts you do not need.
• Maintain a healthy debt to credit limit ratio, keep your credit balances low and do not go over your credit limit.
• Keep a good mix of credit accounts that you pay off when due.
• To maintain a longer credit history, postpone closing old credit accounts until later, even if you do not use it.

The Canadian government provides useful information on how best to manage and monitor your credit report and credit scores here.

Do you know your credit score? Do not be intimidated if it’s not quite as high as you would love it to be. You can start practicing habits to help you rectify financial mistakes and build the financial future you desire one step at a time.

If you have a good score, make sure to maintain this and always check your credit reports, no one loves bad surprises.

Key Takeaways On Credit Score

Credit scores are very important as your financial wellbeing and your ability to draw up credit in the future depend on it. Certain financial mistakes such as making late payments or using up most of your available credit balance, may hurt your credit score.

Some employers also check your credit score to ensure you are in good standing as this may affect any affiliations with them.

It is important to check your credit report regularly to monitor your financial history and keep abreast of your credit.