And How to Improve Your Credit Score in Canada
Building a good credit history is important for your financial health. Your credit history will affect your credit score, and whether you can get that new car, home, or job.
Many factors of your credit history can affect your credit score. But even if you’ve found yourself with a less-than-satisfactory credit score, there are ways you can improve it.
To help you start building your credit, it’s important to understand what your credit score means and how you can hurt and help your credit.
So here’s a look at credit scores, with tips on how to manage, maintain, and even repair your credit score with the help of debt management.
What Is A Credit Score?
A credit score is a rating based on your credit history that indicates your ability to meet financial obligations. In Canada, there are two main consumer credit rating agencies—Equifax and TransUnion.
These credit-rating agencies maintain a record of your credit history, keeping track of whether you pay your bills on time and how you use various types of credit—such as credit cards, lines of credit, and loans.
The information from your credit history will determine the type of credit rating you have, so the better your history, the higher your credit score will be. Credit scores range from 300 to 900, with 300 being the worst score and 900 being the best score.
What is a good credit score in Canada?
How good or bad a credit score is will depend on the credit score range:
- A score of 300 to 575 is considered bad.
- A score of 576 to 650 is considered fair.
- A score of 651 to 750 is considered good.
- A score of 751 to 900 is considered excellent.
A score of 650 might qualify you for a standard loan, but anything under 650 will make it difficult to qualify for new credit.
Why Is It So Important?
A good credit score affects your overall financial health and well-being. When applying for a credit product, utility service, a job, insurance, or to rent an apartment, your credit score will likely be used to determine if you qualify.
Lenders, employers, landlords, insurance companies, and utility companies will often do credit checks to see if you are a financial risk.
So, if you ever need to borrow money to buy a home or a car, a good credit score will help you get approved for a loan, and it will also help you qualify for products with lower interest rates.
A good credit score will also make it easier to rent a car and find housing and employment. Most landlords and many employers check credit reports during rental and job applications.
If you have poor credit, you could be missing out on more than a loan—you may have trouble landing that dream job or living in that perfect home.
With a good credit score, you can benefit from:
- Lower interest rates on credit cards and loans
- Improved chances of being approved for credit cards and loans
- More negotiating power when it comes to interest rates on a new credit card or loan
- Higher credit limits
- Faster and easier approval for housing and mortgage applications
- Better car insurance rates
- Avoiding security deposits on utilities and cell phone contracts
How Is A Credit Score Calculated?
A credit score is calculated based on risk—how much of a risk of not paying you appear to be to lenders. This risk is based on many factors recorded in your credit history.
The quickest way to lower your credit score and appear higher-risk to lenders is by missing or defaulting on your loan or credit card payments. Defaulted accounts and accounts in collections will remain on your credit report for many years. And paying your bills late will also hurt your credit.
Other factors that can affect your credit score include:
The total amount of credit in use, or debt owing, will also significantly affect your credit score. If you use a large percent of your available credit, your credit score can decrease, and lenders might see you as higher risk.
Length of Credit History
Those with no credit history are seen as a higher risk to lenders than those with an established credit history. So the longer you have a credit account in good standing, the better your credit will be.
New credit means you don’t have an established history to prove your creditworthiness with that account. Also, applying for and opening up multiple new credit accounts in a short timeframe can make you appear higher risk to lenders as it signifies that you may be in financial distress.
Types of Credit in Use
While a mix of credit products can help your credit score, having too many accounts—especially many that carry balances—will look to a lender that you are in financial distress and can hurt your credit score.
How to Repair Damaged Credit Scores
First, request a free credit report from one or both of the Canadian credit bureaus. And look over your report to make sure there are no errors that could be hurting your credit score. If there are any errors, report them to the credit bureau immediately.
Otherwise, here’s how to improve a credit score in Canada:
Maintain a Good Payment History
- Always pay your bills on time
- Pay at least the minimum monthly payment if you can’t afford to pay more
- Don’t skip payments, even if you’re disputing a bill
- If you can’t pay the bill, contact the lender/service provider immediately
Use Your Available Credit Wisely
- Don’t max out your credit cards or go over your approved credit limits
- Try to use less than 35% of your total available credit. To determine your total available credit, add up the credit limits of all your credit products—which include credit cards, lines of credit, and loans. Then multiply this total by 35% or 0.35 to get the maximum amount you should use.
Use Different Types of Credit Products
Compared to only using a credit card, use a mix of credit products (and pay off the amounts you owe) to help improve your credit score. Credit products include:
- Credit cards
- Lines of credit
- Loans, such as car loans, mortgage loans, and student loans
Maintain Longer Credit Histories
- Keep credit accounts open for longer, even if you no longer use them
- Avoid opening a new account whenever possible
Keep Hard-Hit Credit Applications & Checks to a Minimum
Hard hits to your credit report are visible and include applications for credit cards, loans, rentals, and sometimes employment. To keep these hard-hits to a minimum:
- Only apply for credit when you need it
- Try to limit the number of times you apply for credit
- Get quotes from different lenders within two weeks when shopping for cars and mortgages so they will be treated as a single inquiry on your credit report instead of multiple inquiries that can lower your credit
Dealing with Debt – Solutions That Help
If you need help managing your debt and improving your credit score, you have options.
Consumer Proposals permit you to avoid bankruptcy and to pay back part of what you owe over a period not exceeding 5 years. A Consumer Proposal will only stay on your credit report for three years from the date it is paid off.
Filing for bankruptcy is an option for those who can’t pay their debts and do not qualify to file a Consumer Proposal. A first-time bankruptcy will remain on your credit history for six years post-discharge, and each subsequent bankruptcy will remain on your credit report for 14 years post-discharge.
Debt consolidation merges your debt accounts into one account, often with a lower interest rate, so you can pay one monthly payment, possibly pay off your debt faster, and not owe multiple creditors. Debt consolidation can help you improve your credit score by paying off lenders more quickly, making your debt more manageable and helping ensure that you do not miss or default on payments.
A bad credit score doesn’t have to haunt you forever. With the help of debt management professionals, you can get out of debt faster and start building up your credit score to have good financial health and all the benefits that come with it.
Baker Tilly Ottawa Ltd. is a professional debt management and Licensed Insolvency Trustee. We have assisted thousands of individuals and couples in financial stress. Our mission – our passion – is your health and well-being!