Looking to buy a car? Rent an apartment? Buy a home? Then, you need to understand what your credit history is and, if necessary, how to improve your credit score.
What is a Credit Score?
A credit score is a three-digit number that tells lenders how risky it is to lend you money and is based on how you have managed credit and debt in the past. Your credit score is a key factor that institutions use to qualify you for loans in Canada, like lines of credit and mortgages.
Other professionals, like employers and landlords, might also use your credit score to judge whether to hire you or rent to you – so it’s important to know your score and, if it’s low, work to improve it.
What is the Average Credit Score in Canada?
The average Canadian credit score is around 650, according to TransUnion. (The average American credit score is different since different formulas are used.)
Everyone’s score falls within the credit score range of between 300 and 900. In Canada, these ranges are broken down into five categories:
- Poor – 559 and under
- Fair – 560 to 659
- Good – 660 to 724
- Very Good – 725 to 759
- Excellent – 760 and over
What is a Good Canada Credit Score?
You’ll need a credit score of 650 or higher to qualify for most financial products in Canada. However, most lenders consider a good credit score to land between 660 and 724, according to Equifax. A credit score between 725 to 759 is considered very good, while a credit score above 760 is considered excellent.
What is a Credit History?
Your credit history (also known as your credit report) lists all the loans, credit cards and other debt — such as rent-to-own, leases and store charge cards — you’ve applied for and used. Each debt also shows how often you hit the maximum borrowing limit, miss payments, and make a late payment.
Essentially, your credit history is a summary of all your loans, debts and subsequent repayments. It gives lenders a snapshot of your responsibility for meeting your financial obligations.
How to Check Your Credit Score
Checking your credit score is easy and takes just a few minutes. There are several websites in Canada that allow you to check your credit score, like Borrowell and Credit Karma.
These websites take about three minutes to sign up and verify your account and allow you to access both your credit score and your credit history. Even better, these websites will send you periodic emails and let you know if there is a change to your score.
Beyond third-party websites like those mentioned above, many major banks in Canada now offer credit monitoring services. For example, Scotiabank allows you to check your credit score from your Accounts page.
If you’re looking to see your credit score directly from the source, you can also request it from the two credit bureaus in Canada, Equifax or Transunion.
Equifax Credit Report
Equifax is a credit bureau in Canada that actually formulates your credit score, and you can check your credit score and credit report directly through this organization. You can get your free Equifax credit report by requesting it online or through writing.
To see your credit score, you can pay a fee. Alternatively, you can sign up for their monthly credit monitoring service, which costs money each month but also notifies you of suspicious activity on your account.
Transunion Credit Report
This organization is the second credit bureau in Canada. Transunion allows you to check your credit score and credit history online instantly and for free. You can also send them a request by mail, also at no cost. Transunion also offers monthly credit monitoring through a subscription-based service.
Can You Improve Your Credit Score?
Suppose you’ve checked your credit score from the two credit bureaus in Canada, and it’s not as high as you were hoping. In that case, you may be wondering, can you improve your credit score?
Yes. It’s totally possible to improve your credit score — even in as little as three months.
The key is to learn what impacts your credit score and focus on those critical areas of improvement. The three biggest factors that impact your credit score are:
- Payment history – Always make your payments on time
- Use credit wisely – Try to use less than 30% of your available credit
- Limit new credit inquiries – Applying for new credit damages your credit score (checking your credit score doesn’t impact it, however)
Should You Use Canadian Credit Repair Services?
If you want to improve your credit score and your finances but you aren’t sure where to start, talk to a credit counselling agency. You can start your search for one through the Financial Consumer Agency of Canada. It’s essential that you choose an accredited credit counselling agency with a good reputation, as there are many organizations out there that will charge high fees without results.
How Does Your Credit Score Impact Personal Finances?
Your credit score can affect your life in numerous ways. Having a bad credit score can significantly limit your options when it comes to loans, mortgages and credit card applications.
For example, here are potential mortgage rates offered to five first-time homebuyers (assuming a five-year fixed-rate mortgage, and all else being equal):
- An excellent credit score — between 760 and 900 — would get the lowest mortgage rate offer.
- A very good credit score — between 725 and 759 — would get a low mortgage rate, but not quite as low.
- A good credit score — between 660 and 724 — would get a slightly higher mortgage rate.
- The fair credit score — between 560 and 659 — may end up getting an even higher rate mortgage, or they could find themselves shopping in the private lender market where rates could jump significantly higher.
What is the Minimum Credit Score to Buy a Home?
In Canada, the minimum credit score required for a mortgage is 640, although there are mortgage lenders and brokers who can find financing for buyers with a credit score as low as 600. But just because you get approved doesn’t mean you should accept the terms.
If your score is 630 or lower, you’ll need to shop for a mortgage in the subprime market, which is dominated by private lenders with rates and terms that are less favourable for the borrower. This means agreeing to a loan with a much higher interest rate and far more restrictive terms.
Final Thoughts
Remember, a credit score is a reflection of your spending. By being responsible with your money, making your minimum monthly payments, not maxing out your accounts, and using credit accounts wisely, you’ll be on your way to a higher credit score. The best time to start improving your credit score is now, and by the time you’re ready to buy a home, your credit scores will help you qualify for the lowest possible mortgage rate.
