When did you last apply for a credit card, mortgage, or line of credit? Do you remember hearing the word “credit score” tossed around? Lenders use credit scores to help them decide whether or not they’ll lend to you. For example, a high credit score may help you secure a loan, while a low credit score may be a factor for rejection.
But what is a credit score exactly, and why does it matter? In this guide, we’ll cover all that, as well as how to check your credit score and the factors that impact it.
What is a Credit Score?
A credit score is a number between 300 and 900 that helps lenders assess your likelihood of repaying a debt. Think of it like a grade on an exam, and the exam as a lifelong history of credit repayment.
Credit scores summarize your credit behaviour numerically based on the information in your credit report. While your credit score is an easy reference, your credit report is a more comprehensive snapshot of your credit history. It documents your open credit accounts, including debts, late payments, and more.
A high credit score makes it easier for you to access credit, like mortgages, car loans, personal loans, and lines of credit.
A low credit score makes lenders wary to lend you money, making it more difficult to access credit. Still, you might get approved for a loan, albeit with a higher interest rate.
So, how high does your credit score need to be for an A+? It depends on the credit bureau you ask. Equifax deems a good credit score to be between 660 to 724. Here are some other ranges to help you assess your score:
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Over 760: Excellent
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725 to 759: Very good
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660 to 724: Good
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560 to 659: Fair
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Under 560: Poor
Why Your Credit Score Matters
Your credit score can impact everything from your ability to get a loan for a vehicle to your eligibility for an apartment lease. A higher credit score may lead to a smaller security deposit when negotiating a lease, lower interest rates on loans, and even more employment opportunities.
Learn more about why your credit score matters.
How Credit Scores Affect Rent and Employment
Canada doesn’t have a minimum credit score requirement for renting an apartment. However, many landlords will look at your credit score as a way to gauge your reliability in paying rent on time.
If you have good credit, they may offer more favourable terms, such as a lower deposit. Your credit score will also impact how some employers view you and where they rank you as a candidate. A high score can show that you’re responsible with money and are, therefore, trustworthy.
What Does It Mean When Your Credit Score Drops?
Your credit score can drop for several reasons.
If you apply for a credit card or loan, the lender will run your credit report (called a hard credit inquiry), which will have a minor impact on your overall score. Big drops are usually attributed to maxing out credit cards, missing payments, or defaulting on loans.
Do your best to avoid these issues, as your score can take months or even years to bounce back after a major hit. Below are factors to consider that may impact your credit score:
Factors that Impact Your Credit Score
There are several factors that contribute to your Canadian credit score.
Payment history (35%): The bare minimum you need to meet to have a positive payment history is paying off the monthly minimums on your debts. Since payment history is the heaviest weighted factor on your credit score, you should pay on time, every time. Missing multiple payments could result in your debt being sent to collections, repossessions, and foreclosures—which all impact your credit score.
Credit utilization (30%): Your credit score can be negatively impacted if you use up too much of your available credit, also known as credit utilization. Say you have $20,000 in available credit and have used up $18,000. Even if you make minimum payments, your credit utilization ratio is high (90%), making you less attractive to credit bureaus and lenders.
Credit history (15%): Time is your friend here. The longer you’ve had access to credit, the more it positively impacts your credit score. This makes it difficult for newcomers to access credit immediately since they typically arrive in Canada without a credit history.
Credit mix (10%): Diversification makes a difference. You’ll notice a slightly higher credit score if you have a healthy mix of credit products. For example, a car loan, credit card, and line of credit instead of only credit cards.
Credit inquiries (10%): Do you find yourself applying for loans frequently? Whether you’re applying for credit cards, payday loans, or even mortgages, lenders must make “hard inquiries” on your credit to inform their decision. The more hard inquiries you have, the more it will negatively impact your credit score.
Keep in mind that everyone’s credit situation is different. If you have a solid payment history but an unfavourable credit utilization ratio, that might not mean your credit score won’t be high. Credit bureaus account for all the details in your credit report before calculating a score. Similarly, lenders will typically review your entire report before deciding on an approval decision.
Does Overdraft Affect Your Credit Score?
Not usually. You shouldn’t see an impact on your credit score after an overdraft. However, if your account goes negative and you don’t repay your bank in a timely manner, your bank could report you to a credit bureau, which will lower your score.
Does Checking Your Credit Score Lower It?
You won’t hurt your score by checking it or requesting a credit report yourself (also known as a “soft inquiry”), but if a lender conducts a hard inquiry when you apply for a credit card or loan, your score will drop a few points.
Some lenders conduct soft inquiries first so you can get an idea of your loan terms and eligibility before authorizing a hard pull.
How to Get Your Credit Score
You can get your credit score online, by mail, or in person. Of course, online is the most convenient.
You can order your credit report and score from Canada’s two credit bureaus directly:
Some providers like Borrowell or Credit Karma allow you to check your score and report for free, as often as you like. Check with your bank to see if they offer free credit score viewing, too.
How to Improve Your Credit Score
If you recently requested your credit report and found out you have a poor credit score, don’t panic. You can improve your credit score over time by following a few steps.
Here’s how:
Pay on time: Do you struggle with due dates? Set reminders and put each bill in your Google Calendar if you have to. You can even automate bill payments with your bank to ensure you're meeting your due dates. Payment history, specifically payment tardiness, is the heaviest-weighed factor on your credit score. Correcting this problem is one of the best ways to fix bad credit.
Correct credit bureau errors: We recommend checking your credit report at least once a year. If you notice any accounts or debts you don’t recognize, reach out to the credit bureau. The error could be a simple human mistake or even a financial scam negatively impacting your credit score.
Get overdraft protection: Have you ever gone into the negative on your bank account? Unfortunately, banks can sometimes report that to the credit bureaus. Overdraft protection might cost you a few bucks per month, but if you’re at risk, it’s worth it to protect your credit score.
Create a budget: We know that life is expensive, and it’s easy to fall into spending more than you earn. One way to mitigate that is with a solid budget. Check out our free Budget Planner to stay organized.
Talk to someone: If you’re feeling overwhelmed with debt, improving your credit score might feel like an uphill battle. That’s why Credit Canada’s certified Credit Counsellors are here, to support Canadians like you with free debt advice.
Consider debt consolidation: There are options if your debt feels out of control. Debt consolidation is a strategy to get a handle on spiraling debt.
Debt consolidation loans can simplify your repayment process by merging all your debts into one single loan and one single payment each month. Debt consolidation programs involve a third party or agency to negotiate a lower debt amount, often helping you save on interest fees.
How Long Does It Take to Improve Credit?
The length of your credit improvement journey will vary depending on factors like your debt load and overall credit history. Your current score can also affect the process.
If you have a high score, it can take months to see small changes and break into the upper echelon. If you have a lot of debt or negative indications on your credit report, you’ll have to make on-time payments for about six months and reduce your credit utilization ratio to see meaningful improvements.
Increasing Your Credit Score as a Newcomer
One challenge newcomers to Canada might face is their lack of credit history. Starting a new life in Canada means leaving your years or decades of positive credit history behind in your home country.
We recommend the following to build your credit as a newcomer.
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Get a bank account. Open a chequing or savings account with a bank or credit union.
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Apply for an unsecured credit card. After a few months, you’ll build some financial history with your bank, at which time you can apply for an unsecured credit card.
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Start with a secured credit card. If you cannot access an unsecured credit card, start with a secured one, which requires a refundable security deposit, usually equal to your credit limit (for example, a $200 deposit for a $200 limit).
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Get an internet or cellphone plan. Start with an inexpensive package simply to build your credit, as cell phone companies report payments to credit bureaus.
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Apply to report your rent to credit bureaus. Rent payments can be used to build your credit, but you have to apply to report them. Use Borrowell’s Rent Advantage tool to do so.
Learn more about building your credit from the ground up as a newcomer with our e-learning modules.
Paying Off Debt Without Hurting Your Credit Score
If you find yourself facing a low score and a lot of debt, you’ll need to create a game plan.
Outline your debts from smallest to largest and note each account’s interest rate. You can attack the debt with the highest interest rate first (known as the Avalanche Method) or begin with the account that has the lowest balance (known as the Snowball Method) and build momentum. Either way, make sure you don’t start closing accounts, as that can actually hurt your score.
Learn how to pay off debt without hurting your credit score.
Improve Your Credit Score with Credit Canada
Your credit score can profoundly affect your ability to go about your life. Whether it’s applying for a mortgage for your home or getting a line of credit, your credit score dictates your borrowing ability and ease.
If you need help improving your credit score, we can help. Credit Canada’s certified Credit Counsellors support Canadians on the phone, through live chat, or using our Digital Assessment to get out of debt and back into life. Call us today at 1(800)267-2272!
