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Credit Score 101

Published by My Rate Compass Team | Updated Dec 05, 2020
Credit Score 101

Here’s everything you need to know about credit score basics: why it’s important, how to get it, and how to improve your score.

Fact: Two-thirds of the households in Canada have debt, according to a 2017 report by the Royal Bank of Canada. Household debt includes mortgages, lines of credit, car loans, personal loans, and personal debt. Because debt in Canada is ever increasing, it has never been more important to know about credit score basics.

 

What is a credit score?

A credit score is a three-digit number based on the calculations in your credit report. Your score represents how well you manage credit. In Canada, a score can range from 300 to 900. The higher your credit score, the better.

Lenders look at your credit score to gauge whether you  qualify for a loan or not. According to TransUnion, 650 is a good number. A score between 575 and 649 is considered “fair” but may not qualify you for the lowest interest rate. Anything above 750 will not have a significant impact on a credit decision.

 

What is a credit report?

A credit report is a document that contains factual and financial information about you. It lists all your credit accounts, including payment history, limits, and balances – even loans you’ve taken out in the last 6 years!

Your credit report is automatically created the moment you apply for credit for the first time. Lenders submit information about your application to credit bureaus (or credit reporting agencies).

The credit file may contain the following information:

  • Registered items, such as a lien on a car
  • Bankruptcies and foreclosures
  • Actual inquiries made by credit grantors
  • Credit history and banking information
  • Non-sufficient fund payments
  • Consumer statements, identity verification alerts, fraud alerts, and other remarks

 

What is a credit rating?

A credit rating is another term for your credit score. It is calculated by credit reporting agencies using a formula based on your credit file. This changes over time as your report is updated.

Here are a few things to note in your credit rating:

  • You get points for transactions that show you manage credit well.
  • You lose points for bad credit transactions (e.g. regularly missing payments).

 

How is your credit score calculated?

There is little information provided on how credit bureaus calculate your credit score. CRAs consider this information their “secret.” However, they provide a list of factors that affect your credit rating. These are:

  1. Payment History – A good record of on-time credit payments will boost your rating. Paying late will have a negative impact on your score. Delinquencies also have a similar effect.
  2. Utilization and Balances – A credit card balance above 50% of your credit limit will negatively impact your rating. Avoid maxing out your credit and aim for balances under 30%, according to TransUnion.
  3. Credit History – You earn more points the longer you have your account/s opened. Avoid closing any account if you plan on applying for a loan in the future.
  4. Credit Inquiries – Too many credit inquiries and applications in a short timespan make it look like you are desperate for financial help. Avoid applying for credit unless you need it.
  5. Credit Mix – A good combination of credit accounts and loans make a healthy credit profile. Try a mix of retail store cards, personal loans, a line of credit, mortgage, etc. instead of sticking to only credit cards.

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How to find out your credit score?

You can find out your credit score for a fee from these credit bureaus:

These companies collect, file, and share information on  how you manage credit in your credit report. Asking for your credit report is FREE when done via mail, telephone, fax, or in person. We recommend asking for your credit file at least once a year to avoid fraud and identity theft.

 

Credit score range

 

760-900: Excellent

690-759: Good

660-689: Fair

560-659: Below Average

300-559: Poor

 

Why is it important to have a good credit score?

Your credit score is used by employers, landlords, utility companies, insurers, and lenders to assess your credit behavior. It is an important aspect of your financial profile because it affects decisions when:

  • Applying for a job
  • Applying for a loan
  • Applying for an apartment or rental housing
  • Renting a vehicle
  • Getting insured

 

How to build credit history in Canada?

Want to build your credit history fast? These strategies may help:

  1. Apply for a credit card. Get to know the different types of credit cards in Canada. Go for unsecured credit cards, if possible. If you’re not qualified for an unsecured card, then try secured credit cards.
  2. Get a mobile phone plan. Your post-paid subscription is one way credit bureaus track your payment history. There are phone carriers that don’t require your credit history upon application.
  3. Get a car loan with a large deposit, if you can. Remember: A good credit mix gives a higher credit score.
  4. Pay your balance full and on time. 65% of your credit score is based on your payment history and balances. If you can’t pay in full, make sure to pay at least the minimum before the due date as on-time payments still have a significant effect on your rating.


How to maintain a good credit score?

You can maintain a healthy credit score by reviewing your credit reports at least once a year. Just like a regular check-up from your doctor, a credit report review ensures that the information on your file is accurate. Using this tip, along with our strategies on building good credit history, will help you have a high score – and keep it that way.

How to rebuild your credit?

So you made some bad financial decisions - and it’s affecting your credit. The good news is that you can rebuild your credit by following these tips:

  1. Lower your balances. Create a payment plan to reduce your credit balance to less than 50%.
  2. Make sure that all information in your credit report is correct.
  3. Contact the lender right away if you think you might miss a payment. You can ask for a free copy of your report by mail through Equifax and TransUnion.
  4. Make sure you don’t miss payments. Pay on time even when you just have to pay the minimum.
  5. Open a secured credit card account or secured loan. This will alert the credit bureaus of your credit habits, so you can gain positive points for your score.

Remember, your credit score is not a measure of your worth as a person. With the knowledge of credit score basics, you can use this financial measuring tool to get you ahead on your plans.

 

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My Rate Compass is a Canadian personal finance portal helping consumers make the most informed financial decisions and take control of their finances through financial literacy. We offer tools, articles, and resources to inform, educate, and provide advice on credit cards, mortgages, loans, RSPs, GICs, TFSAs, bank accounts and credit scores.