Guess what? Lenders want you to have a high credit score. Why? Because lenders don’t like risk.
If you have bad credit, you’re considered to be high risk to a lender. And since bad credit customers are statistically more likely to default on a loan, all customers that fall into this bracket experience higher interest to compensate for a higher default rate.
It’s no fun having bad credit. Having bad credit (or no credit) limits your ability to shop around for the best financial products or rates, and may even make it hard for you to receive funding at all. If you are approved, it may come with very high APR, and require some kind of collateral or a co-signer to offset the lender’s risk.
The good news is, your credit score can change for the better! The first step is to know what it is and check it regularly. It’s also worth knowing the criteria used to calculate your credit score, what a healthy credit score looks like, and what steps you can take to improve your credit score...
How can I check my credit score?
Many people don’t want to check their score because they’re afraid. It’s understandable, as sometimes ignorance is bliss, but when it comes to your financial health, the more knowledge you have, the better. After all, if your credit score is poor or fair, you owe it to yourself to find out why and try to fix it.
You can download a copy of your credit report and your credit score for free! Borrowell can set you up with a credit monitoring account. Simply sign up with a few quick details and you’ll be examining your credit report within a few minutes!
What is the credit score range in Canada?
According to Equifax, credit scores in Canada range from 300 to 900. This range has been divided up into five sections: Poor, Fair, Good, Very Good, and Excellent. The higher your score, the less risk you pose to a lender and more financial options are available to you. You do not have a static score; your behaviour determines your score over time. If you make bad financial decisions your score will go down, but if you make good financial decisions your score will improve.
What Is a good credit score?
According to Equifax, a good credit score in Canada is 670 or over. Anything above 740 is considered very good, and a credit score over 800 is considered excellent. Here’s a breakdown of the different levels of credit scores. As you can see, the higher the number is, the better your credit health is!
How is a credit score calculated?
In Canada, there are two major companies called credit reporting agencies (or credit bureaus) that collect information about your financial history. They are TransUnion and Equifax.
Transunion and Equifax gather information from banks, collection agencies, credit card companies, and other lenders to formulate a snapshot of your credit trustworthiness in a simple 3-digit score.
While TransUnion and Equifax differ slightly in how they compile a score, they both care about these indicators:
- How much money you owe
- If you’ve been making payments and if they’re on time
- How much money you’ve borrowed
- How long your credit history is
- How many inquiries into your credit file there has been
- Any public records of bankruptcy or collections
According to Equifax, the main factors involved in calculating a credit score are:
1. Payment history (35%)
The entire landscape of your credit payment history is captured in this segment and is the bulk of your score. It includes information on how you’ve repaid credit on all credit accounts, if you’ve been late on any payments, how often you’ve been late on those payments, how much is owed on the accounts, if any of those accounts are delinquent or have been.
Because it is the largest chunk of your score, it’s important to make payments on time, even if it’s just the minimum.
Any credit account history will be considered, as long as it’s been reported to the agency. Accounts include installment loans, credit cards, lines of credit, student loans, mortgage loans (for primary, vacation and investment properties), retail store accounts, auto loans, finance accounts etc.
2. Credit utilization (30%)
This is your total credit limit (across all credit card accounts) versus how much is being used. For example, say you have a credit card with a limit of $10,000 and you have a balance of $3,000 on it. Your credit utilization is 30%.
If you have multiple cards that equal $10,000 of total limits and a balance of $3,000 across them, then your utilization is still 30%.
Experts say that having credit utilization of 30% or less is ideal but 10% is better.
3. Credit history (15%)
What was the first credit account you ever opened? Was it a credit card? Was it a line of credit? Maybe it was a mortgage? Regardless of what it was, the day you were first given a loan effectively began your credit history.
The older your credit history is, the more favourable it is, especially if you’ve had only one or two missed payments. For example, if your credit history is 10 years old and you’ve only made late payments twice in those 10 years across all accounts, that looks much better verses an account that’s been open for 3 years and has had 2 missed payments.
That said, that account still needs to be open for it to count towards your total credit age, otherwise, any closed accounts will fall off and the next oldest account will be the goalpost for the total credit history’s age.
4. Public records (10%)
If you’ve had negative credit issues in the past that went beyond a few late payments (think bankruptcy, court judgements, consumer proposals or any collections issues), then those will be factored into determining your credit score. Depending on how bad it is, they could very negatively affect your score even at only 10%.
For example, if you have an “R9” on your account, that’s a credit card bankruptcy that will negatively affect your score for up to 7 years.
For more information on the numbers and letters that appear on your credit report, check out our post on How to Check and Dispute Errors on your Credit Report.
5. Inquiries (10%)
Inquiries, or “credit hits” or “credit pulls”, is when your credit file is accessed for any reason at all. Depending on the type of “hit/pull”, it may negatively affect your score or not at all. The ones that might cause your score to dip a few points are considered “hard” inquiries. The reason for the dip is that it might indicate the borrower is experiencing financial difficulty and looking for credit to ride the wave, but not always.
Amount of inquiries matter, but the timing of them does as well. For example, if you’re shopping for the best mortgage rate, there may be several “pulls” on your score/report while banks are checking you out. If it’s a single event, it’s easily explained away.
What are the advantages of good credit?
Having a great credit score opens up the best (see: lowest) interest rates, repayment periods, perks, and offers from lenders. If a lender sees your rating as good to excellent, they know they’ll get their money back.
With good credit, one of the biggest benefits to you is that you’re not at the mercy of predatory lenders that charge astronomical interest rates. You can shop around for the very best rates and offers. Once you have good credit, more options open up to help you further improve your score as long as you keep up with your positive financial habits!
How can I improve my score?
If you checked your credit score and didn’t like what you saw, there’s good news. Anyone can start to improve their credit score. You can see an improvement in as soon as 30 days if you follow the right steps:
- Since utilization is the biggest factor in determining your credit score, the key is to pay down your debts as quickly as possible. Financial experts suggest slicing down credit card debt first over any other loan, as they usually have the highest interest rates. From there, go for the highest balances.
- If you’re only able to make minimum payments for the foreseeable future, then the next factor to look at is making sure you’re making your payments on time, every time.
- If you have old accounts, don’t close them. Remember, the longer your credit history is, the better, especially if you have missed payments in recent history.
Fresh Start Finance Is here to help!
Fresh Start Finance serves Canadians facing all types of credit situations. We offer quick-and-easy secured and unsecured installment loans, as well as other credit-building solutions, to help you take those first steps to a better financial future.