Whether we like it or not, credit is a vital part of modern life: mortgages, credit cards, store cards and auto loans are all based on a system of credit. The more we know about the system and about the way we fit into it, the more we can make it work for us.
In a nutshell, your credit score is an indicator of your financial wellness. Your personal score sits on a scale of 300 to 900—the bigger the number, the better for you. When you apply for loans of any kind, companies use your score to decide whether or not to grant you credit in the first place, and if so, how much. If you have a good credit score, you are likely to receive a higher credit limit on new credit card. If you have a bad credit score, you may be restricted to prepaid credit, or you could be shut out of the revolving credit market altogether.
Credit scores also have an impact on interest rates. Cards available to people with high credit scores generally tend to carry far lower APRs than cards available to people with low credit scores or limited credit histories. Additionally, you’re much more likely to be able to negotiate a lower interest rate on a high-value long-term instalment loan—like a mortgage or a car loan—if you have a good credit score.
What are the Main Credit Reporting Bureaus in Canada?
Two main credit bureaus operate in Canada: TransUnion Canada, founded in 1989, and Equifax, which began reporting in 1921. Roughly the same proportion of lenders pull report from each bureau, and some lenders pull reports from both bureaus before making credit decisions.
You can order your credit report and score easily online from either Equifax or Transunion for either a one-time fee or a recurring monthly fee that provides unlimited updates and fraud monitoring of your credit profile. It’s also possible to get one free credit report a year in Canada by submitting a request by regular mail, with details available on each reporting bureaus website.
How are Credit Scores Calculated?
TransUnion Canada and Equifax calculate credit scores using similar five-factor formulas. Credit account history, payment history on current and past accounts, outstanding debt, types of credit and recent enquiries all go into their equations.
Positive credit score influences include:
- A history of on-time payments
- A good balance of revolving, open and installment accounts
- An appropriate debt-to-income ratio
Any of the following will lower a credit score:
- Late or missed payments
- A short or absent credit history
- A high debt-to-income ratio
- Too many open credit accounts
- Too many recent hard credit enquiries
As well as credit scores, Canadian financial reports contain two-character individual credit ratings from each lender, which define each type of credit account and indicate a consumer’s payment history on the account.
Your TransUnion Canada and Equifax scores will be similar, but they won’t be exactly the same because each bureau uses a slightly different risk scoring method. TransUnion Canada calls its custom formula the CreditVision scoring model, while Equifax uses the Equifax Risk Score. TransUnion Canada’s system takes into account the last 24 months of a consumer’s credit history, whereas the Equifax formula uses the last 81 months—or nearly seven years—of a person’s credit history to create a score.
What are Good and Bad Credit Scores?
In Canada, consumers are given a credit score between 300 and 900, depending on their histories and their spending habits. Lenders break the scale up into several ranges:
300-599: Poor. Getting credit is nearly impossible at the lower end of this category and credit terms are usually unfavourable if your score sits below 599.
600-649: Fair. You may be able to obtain limited credit.
650-719: Good. You’ll qualify for reasonably decent interest rates and should be able to obtain most types of credit.
720-799: Very good. You have a range of competitive credit options at this level.
800-900: Excellent. The very best interest rates, credit cards and mortgage deals are within your reach.
How To Improve Your Canadian Credit Score
Thankfully, credit scores are fluid and change over time depending on your financial behaviour. If your credit is good, very good or excellent, then keep doing what you’re doing to improve your score even more.
You may feel very discouraged if your credit is bad, but don’t be: you can make decisions that improve your score even if your financial circumstances are dire.
Financial Emergency Measures: If you’re in a temporary bind and can’t make a payment, the first thing to do is to call your lenders and explain your situation. The majority of lenders are reasonable and they frequently grant payment extensions to people in financial trouble. Calling your lenders can help protect your credit score.
If you’re not in an emergency situation and simply need to change your spending habits, here are six ways you can improve your financial outlook and your credit score:
- Pay your bills on time and in full every month. Credit cards, auto loans and cellphone bills paid in a timely manner all paint a responsible financial picture.
- Use your credit card responsibly. Try not to max out your credit cards; instead, use less of your available credit so that you don’t appear desperate to borrow money.
- Get a secured credit card or a starter card and use it in a sensible way. Several reputable companies offer secured cards or cards with low credit limits to new consumers and people with bad credit. If you use one of these cards in a responsible way for a while, you’ll build a good history on your line of credit. At that point, better cards with higher credit limits and lower interest rates will become available to you.
- Dispute errors on your credit report. If you notice payment errors or accounts on your credit report that don’t belong to you, contact the credit bureau immediately.
- Pay off collection accounts. Delinquent debts affect credit scores negatively. Knock out collection accounts, even if you need to make small payments over time to do so.
- Leave ancient mistakes alone. Most collection accounts fall off credit bureau reports after about six years, so if your delinquent debt is very old, leave it alone and let it slip into the past.
Because TransUnion Canada use a 24-month formula rather than an 81-month payment history, your TransUnion score will probably improve sooner than your Equifax score. Don’t be discouraged, though: Equifax will notice your improved financial habits and your Equifax score will change for the better.
You can boost your credit score by adopting good financial habits. When you gain access to better interest rates and favourable loan terms with your increased credit score, you can improve your personal economic outlook.