Credit Scores in Canada

As a result of the pandemic, Canadians have massively improved their credit scores. Research, led by the fintech company Borrowell, found that an average rise of a credit score was around 18 points all over the country. As a consequence, many of those whose score was considered poor and unreliable for creditors, now have moved from the “below average” category to a “fair” with an average score of 667 points. 

Why does the credit score matter? 

For non-Canadians, such huge attention to your credit score might seem surprising. Though, for most of the residents, to have their credit score positions at least at a considerably good level results to be one of the basic needs. 

Your credit score will prove your reliance even at the time of seeking a new job. Your new employer can ask to check your credit history and if it seems not satisfactory enough, you might be denied a vacancy. Moreover, your credit score could be required by your landlord when renting an apartment, and of course, it will be one of the priorities at the time of applying for a realty loan. For instance, the minimum credit score for a mortgage application in 2021 has been between 620 and 680 points. 

What is a credit score and how high should it be? 

Generally speaking, a three-digit number ranging from 300 to 900 and widely known as a “credit score” shows your capability to manage your finances. It reflects all your credit-related activity as well as paying bills, missed payments, the speed of your credit utilization, and other aspects of your finance-related activities. Mainly scores are divided into five categories. The names and an exact number of points at each category can vary, though the main principle of division is as follows. 

Scores under 500 and sometimes under 579 are considered as very poor, poor, or terrible. Individuals with such low rates most probably won’t be approved for loans and credit cards. 

Scores between 580 and 619 are still considered poor and indicate individuals at high risk. Most probably even if the credit is approved, a borrower will have to agree with very high-interest rates.

After 620 points the scores can already be considered as average (till 679 points), good (between 680 and 779), and excellent (higher than 780). Generally speaking, if you are near 700 points most probably, you will be approved for a new loan and can count on good credit payment conditions. 

How is my credit score calculated? 

For Canadian residents building up their credit scores, mostly starts with their first credit card. Once you obtain it, all your credit operations will be recorded and already within six months credit bureaus will have enough information about you in order to calculate your first points. Most probably, the calculation of your credit points will start somewhere from the middle of the scale and will go down or up already depending on your credit behavior. 

However, there is a certain dependence between the average credit score and the age of an individual. Seniors over 65 tend to have their credit scores higher and mainly above 759 points, while at the age of 26-35 years it is typically around 690-700 points. 

It would be a mistake to consider that your credit score depends only on age or credit-related activity. 

Paying bills on time is also one of the crucial factors of maintaining your points at a good level, while missed payments will significantly damage your reputation. 

There are five main factors that affect your credit score. Your payment history will make up to 35% of your rating. Here is when it is extremely important to be good at handling your finances. Especially, in paying down the outstanding debts on time. 

For credit bureaus, your missed payments will be indicated by a letter and a coherent number, where “I” will be used for installment loans and “R” for revolving payments. The letter will be followed by a number which means the period of time you are late in repaying your debt. If your status is I1 or R1 everything is ok but if your category begins to lower to I2 or R2 you have to start carefully paying down the bills. Once you get to I6/R6, that would mean that you have already missed 6 months of payments. That is when the lenders usually begin to sell your debts to collectors agencies. Once been sold, your status continues to lower and if you end up with a repossession of your loan, it significantly damages your credit score. 

However, there is some good news too. Many people believe that only one or two days of missed payments are badly affecting their credit status. It is not true, as missed payments are calculated in 30 days periods. So once you miss a payment date, you will have a monthly long so-called “grace period” when you can repair your situation and get out without any damage to your credit score. 

The second factor is your debt utilization. Your debt utilization measures the amount of spent money compared to the total available and it accounts for 30% of your credit score. 

It is highly recommended not to use the entire amount available on your credit card. For a lender, it will point out that you are either in a difficult financial situation or that you risk running out of your payment abilities. And neither of the above is good for your reputation. Some experts advise not to max out your credit utilization ratio more than 30% percent of the total amount. On the other hand, playing out with your debt utilization number might be one of the easiest ways to repair a damaged credit score. 

Up to 15% percent of your credit score will depend on your credit history. Your credit history demonstrates how long you have been using your credit accounts. Mainly creditors prefer to see you managing your credit accounts well for quite a long period of time. 

Almost 10% of your credit score is made up of public records. The history of your bankruptcy, repossession of your debt, consumer proposals will stay in your credit report for years and will seriously damage your reputation as a borrower. Unfortunately, for the lender, it will show you as a very risky client, while the record about your financial problems will stay for at least 7 years. In this case, time will be the only cure for your damaged score. 

Another 10% are attributed to inquiries. There should be distinguished two types of inquiries – a soft one and a hard one. While soft ones (for example if you ask for a copy of your account) do no harm to your score, the hard ones are usually made at the time of applying for a new loan. However, credit bureaus are using smart algorithms while checking a client and consider several factors at the same time. If they realize that you are desperately trying to apply for a new credit each month, it most probably will impact your score. 

If there is a number of recent inquiries it can signal that you are in some sort of financial distress and combined with other factors may lead to a certain decline in your credit score.

Where to monitor my credit score? 

  • Two main Canadian credit bureaus engage in updating you about your credit scores for a fee. These credit scores can be purchased in person, online or by email.
  • Free credit scoring sites. Apart from Equifax and Transunion, there are some web services, providing scores to their consumers for free. Each website will use it’s own calculation formula and the result of checking your credit score in several sources can be surprising. 
  • Request your bank or credit union. For some people it might be the easiest option, as some banks and credit unions provide this service for free for their clients. However, you should understand that the score you will receive is not used by the issuing institutions, i.e. banks and credit unions to make lending or other decisions. 

Checking your credit score does and does not make sense at the same time. Every company, no matter whether it is a free or paid service, is providing you with a report only for educational purposes. That means that it is for you and doesn’t have any legal force. You won’t be able to use the report about your credit score at the time of applying for a line credit or a mortgage. 

You should also take into account that each agency, credit bureau, free or paid service will use its own formula in order to calculate your credit score, and sometimes you will receive a surprisingly different result.

However, these educational scores still can be useful as they will indicate to you that you have some significant problems with your score and you will have time to improve the situation before receiving a hard inquiry from the lender’s organization. 

Some tips to improve your damaged credit score

A better credit score usually means less severe credit payment conditions and sometimes helps you to significantly save up money. As a bonus, individuals with higher credit scores can receive a bigger percentage of cash back, airline, or travel cards. 

Here are some tips to enhance your credit score positions. 

Always pay your bills on time. Not paying bills on time is affecting your credit score not less than missed payments. Your paying history is one of the crucial elements at the time of building up a credit score. 

Be careful with missed payments. Several missed payments in the past won’t ruin your credit score. However, for lending organizations, it is really important that your credit activity recently has been accurate enough and you have already fixed your financial problems. 

It is also important to always make sure that you are applying only for the credits you really need. If you already have a credit card and it is enough to cover your needs, make an accurate evaluation because sometimes there is really no point to open another credit line which in the future may lead to damaging your score positions. 

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