Your credit score is an assessment of your ability to fulfill the financial commitment of borrowing credit at a particular time, based on your financial history as reported to the credit bureau. It is important to remember that your credit score is dynamic. This means that it will change as your financial circumstances change.
In Canada, your credit score ranges from 300 to 900, 900 being a perfect score. If you have a score between 780 and 900, that’s excellent. If your score is between 700 and 780, that’s considered a strong score and you shouldn’t have too much trouble getting approved with a great rate. When you start hitting 625 and below, your score is getting low and you’ll start finding it more and more difficult to qualify for a loan.
A low credit score doesn’t mean you’ll never be able to borrow. Some places might still lend you money, although at a higher interest rate. This is one of the ways you’ll find your credit score really matters: the better your score, the less you pay on interest.
How is your credit score calculated?
Your credit score is determined by your credit history. Every time you apply for or receive credit, every time you make or don’t make a payment on time, and every time you use your credit you are building your credit history. Your credit score is calculated using the following five factors:
1. Payment history
- Do you pay your bills on time?
- How frequently do you miss a payment?
- How many times have you missed a payment?
- How old are your missed payments?
2. Debt utilization ratio
- How much in total do you currently owe?
- How much are your payments?
- How much of your available credit do you use on an ongoing basis?
3. Credit history
- How long has it been since you first obtained credit?
- How long you’ve had each account for?
- Are you actively using credit now?
4. Credit application frequency
- How many times did you request a credit check in the last 5 years?
- How many credit accounts have you opened recently?
- How much time has passed since you last opened a new account?
- How long ago was your most recent inquiry?
5. Credit diversity
- Do you have high levels of revolving credit?
- Do you use deferred interest or payment plans to pay for large purchases?
- Do you resort to loan consolidation services?
- Do you access payday loans or other unsecured loans?
How do you check your credit score in Canada?
In Canada, your credit score is calculated by two different credit bureaus: Equifax and TransUnion. Both of these bureaus can provide you with your credit score for a fee, or you can request a free copy of your credit report (not including your credit score) by mail.
How do you improve your credit score?
Once you understand how your credit score is calculated, it’s easier to see how you can improve it. Here are a few easy ways:
- Make regular payments
- Close your newer accounts
- Accept an increase on your credit limit
- Use different kinds of credit when possible
The Bottom Line
In summary, understanding your credit score helps you to consider the debt you are taking on more closely, and as such will help you to develop strong financial habits and achieve long term goals such as owning your own home.