Credit Score

Updated on July 19, 2024

Credit scores play a major role when it comes to applying for loans, credit cards, utilities, and more. They are the first thing banks and other lenders will look at when making a decision on your request. Bad or low credit scores can affect approval for the loan and the loan’s interest rate.

With a higher credit score, you benefit from lower interest rates and better chances of approval. With lower credit scores, lenders may see your file as high risk, offer a higher interest rate, or require some security to finalize the approval.

Your credit report and credit score

Your credit history is summed up in your credit report. Your credit report is made the first time you borrow money or try to get credit. Credit bureaus, also called credit reporting agencies, get information about your accounts from the lenders. Your three-digit credit score is based on your credit report information. It displays how well you control credit and how much risk it would be for a lender to give you money. A formula based on your credit report is used to figure out your credit score.

Keep in mind that:

  • get points if you use your credit responsibly
  • If you have trouble taking care of your credit, you will lose points.
  • As your credit report changes over , so will your credit score.

How important is your credit score

In Canada, financial institutions use your credit report and credit score to decide if they should lend you money and at what interest rate. Here’s a detailed breakdown:

Credit Score Range

In Canada, credit scores range from 300 to 900.

What is a Good Credit Score?

  • Excellent: 760-900
  • Very Good: 725-759
  • Good: 660-724
  • Fair: 560-659
  • Poor: 300-559

Canadian Average Credit Score

The average credit score in Canada is around 650-725. Scores in this range are generally considered good and indicate that you are a reliable borrower.

Difference Between Credit Score and Credit Rating

  • Credit Score: A numerical value that represents your creditworthiness based on your credit history. It is calculated using data from your credit report.
  • Credit Rating: A more comprehensive evaluation that includes both your credit score and other factors like your income, employment history, and overall financial situation. It often includes qualitative information and may be used for larger financial decisions, like mortgage approvals.

 

Your credit score is a significant factor when it comes to borrowing money. It’s a number between 300 and 900 that shows how trustworthy you are as a borrower based on your overall credit history. A host of factors go into determining that number, including payment history (if you pay on time or miss payments), accounts in collections, cancelled accounts and debt settlements.

Think of your credit score as your overall credit “report card.” A credit score below 650 is generally considered “bad.” The further below that number you go, the worse your chances of getting approved for loans become, and the higher your interest rates will be.

Credit rating is a system for evaluating the status of each of your accounts from a financial perspective. It’s a letter and number combo assigned to each of your credit accounts, indicating how well you manage and pay off each specific debt. So, each of your active credit accounts will have a credit rating which takes the form of a letter and a number.

The letters are “I,” “O,” and “R,” and the numbers range from 0 to 9.

  • I means your loan is “installment” based (i.e. you’re paying some fixed amount over a specified period of time).
  • O means you have “open” credit (like a line of credit or student loan).
  • means you have revolving credit (an amount of money you owe that changes over time, like a credit card balance).

Beside each of these letters, you’ll find a number from 0 to 9. With the exception of 0, the lower the number, the better the rating.

  • 0 means there is no credit history associated with the account, usually because you haven’t used it.
  • 1 is the best rating you can have—it means you pay within 30 days of the payment due date and have no past-due payments.
  • 9 is the worst rating you can have, and usually means your account is in a lot of debt and has been placed in collections or bankruptcy.

 

Understanding these details can help you maintain or improve your credit standing and secure better loan terms.

For individuals with no credit history or bad credit, it might be harder to get a credit card, loan, or mortgage. It could even make it hard for you to get a job or rent a house or apartment.

Find out your credit score

You can’t know for sure how much your credit score will change depending on what you do. The formulas that credit bureaus and lenders use to figure out credit scores are kept secret.

Here are a list of factors that can have an impact on your credit score:

  • The amount of time you had credit
  • The amount of time each credit has been on your report
  • If your credit cards have a balance
  • If you miss payments often
  • how much you owe
  • being close to, at, or over the limit of your credit
  • how many credit requests have been made in the past
  • type of credit you are using
  • If a collection agency has been sent to get your debts
  • any insolvency or bankruptcy on file

Lenders decide what your credit score needs to be for them to approve your loan.

If you have good credit, you might be able to get lower interest rates. However, the credit score you see may not be the same as the score a lender sees. This is because when calculating your credit score, a lender may give more weight to certain information

Who writes your credit report and gives you your credit score?

In Canada, there are two main credit bureaus:

  • Equifax
  • TransUnion

Credit bureaus keep track of how you use credit and they share that information with other companies, like banks and other lenders. Equifax and TransUnion only get information about your financial history in Canada from your creditors.

If you ask, some Canadian banks may be willing to consider your credit history from another country. This can be important for new immigrants or people who have recently moved to Canada and do not yet have a Canadian credit history. Without a credit history in Canada, it might be challenging to get approved for loans or credit cards, and you might face higher interest rates.

To use your international credit history, you might need to take extra steps. For example, you could obtain a copy of your credit report from your previous country and schedule a meeting with a branch officer in your area. The bank may require additional documentation to verify the information on your foreign credit report. This process can help establish your creditworthiness and potentially lead to better financial opportunities in Canada.

Who can see your credit report and use it?

Credit bureaus have rules about who can look at your credit report and what they can do with it.

This is who can look at your credit report:

  • banks, credit unions, and other places that handle money
  • credit card companies
  • car dealerships and rental companies
  • retailers
  • mobile phone companies
  • insurance companies
  • governments
  • employers
  • landlords

 

Businesses or people that use your credit report to make a decision on your file/request. These decisions could involve:

  • lending you money
  • collecting a debt
  • looking at you as a possible tenant 
  • considering you for a job
  • providing insurance for you
  • offering you a better job
  • offering to give you more credit

 

“Check your credit” or “pull your report” may be a request from a lender or other organization. When they do this, they are asking the credit bureau for a copy of your credit report. This shows up on your credit report as a hard pull credit inquiry. Lenders also us soft pulls, they do not affect your credit score and are used for general information purposes, hard pulls are directly related to credit applications and can impact your score. Managing the number of hard pulls can help maintain a healthier credit score.

Soft Pull vs. Hard Pull on Your Credit Report

When someone checks your credit report, it can be either a soft pull or a hard pull. Understanding the difference between the two is important as they impact your credit score differently.

Soft Pull

  • Definition: A soft pull, or soft inquiry, occurs when your credit report is checked for non-lending purposes.
  • Examples: Pre-approved credit offers, background checks for employment, personal credit checks.
  • Impact on Credit Score: Does not affect your credit score.
  • Visibility: Soft pulls are only visible to you and do not appear on credit reports that lenders see.

Hard Pull

  • Definition: A hard pull, or hard inquiry, occurs when a lender checks your credit report to make a lending decision.
  • Examples: Applying for a mortgage, car loan, credit card, or any type of credit.
  • Impact on Credit Score: Can lower your credit score by a few points and multiple hard pulls within a short period can have a cumulative effect.
  • Visibility: Hard pulls are visible to anyone who checks your credit report and remain on your report for about two years.

Why the Difference Matters

  • Loan Applications: Multiple hard pulls in a short time can signal to lenders that you are seeking a lot of credit, which might be seen as risky behavior.
  • Credit Management: Understanding the difference helps you manage your credit score effectively by avoiding unnecessary hard inquiries.

 

If there are too many credit checks or inquiries on your credit report, lenders may be worried.

  • Having more than 5-6 hard inquiries within a 12-month period can be considered too many.
  • Multiple inquiries suggest to lenders that you may be seeking a lot of credit in a short time, which can indicate financial distress or increased credit risk.

Companies would think that you need money right away or that you’re trying to spend more than you have.

Consent and checks on your credit

A business or person in these provinces needs to advise you that they are checking your credit report:

  • Nova Scotia
  • Prince Edward Island
  • Saskatchewan

In other provinces, someone needs written permission to review your credit report. When you sign a credit application, you give the lender permission to look at your credit report. When you apply for credit for the first time, most lenders can run your credit report if you allow them. They can also use your credit whenever they want as long as your account is still open.

Most of the time, if you agree, the lender can also share information about you with credit bureaus. This is only true if the lender agrees to give you the loan.

What does your credit report show?

Your credit report contains information about you, your finances, and your credit history. It can take 30 to 90 days for your credit report to be updated.

Your credit report has information about you and might have information about:

  • name
  • date of birth
  • current and previous addresses
  • current and previous telephone numbers
  • social insurance number
  • driver’s licence number
  • passport number
  • current and previous employers
  • current and previous job titles

Your credit report could include:

  • payments that don’t have enough money to cover them.
  • checking and savings accounts that were closed “for cause” because of a debt or fraud.
  • Credit cards, retail or store cards, lines of credit, and loans are all forms of credit.
  • bankruptcy or a credit-related court ruling against you
  • debts sent to collection agencies
  • inquiries on your credit report from lenders and other people who have asked for it in the past three years
  • If you have a lien on something, like your car, the lender can take it away if you don’t pay
  • fraud alerts and identity verification alerts

Your credit report has information about your loans and credit cards, like:

  • when you first started using it
  • how much you owe
  • If you’re on time with your payments
  • if you miss payments
  • If your debt has been given to a collection agency
  • If you spend more than you can afford
  • Information about a person that can be found in public records, like a bankruptcy
  • Checking and savings accounts that were closed “for cause” can also be on your credit report. These include accounts that were closed because the account holder owed money or did something wrong with the account.

Other accounts that a credit report shows

Your cell phone and internet provider may tell your credit bureau about your accounts with them. Even though they aren’t credit accounts, they can show up on your credit report.

Your mortgage information and how well you’ve paid your mortgage may also be in your credit report. Credit bureaus decide whether or not to use this information when figuring out your credit score.

If you add a home equity line of credit (HELOC) to your mortgage, it may be shown on your credit report as part of your mortgage. This would be reported separately from your mortgage.

Beware of Identity Thief

Your credit report is another place where you can look for indications of identity theft. At the very least once a year, you should carry out this activity for both of the credit bureaus. Investigate the possibility that someone has applied for a loan or credit card in your name without your knowledge. Read our article and inform yourself about identity thief .

Credit Score Frequently Asked Questions

No, only inquiries you initiate for credit transactions affect your score. Scoring models ensure that multiple inquiries for auto or home loans within a short period don’t lower your score.

Inquiries are less important than delinquencies, balances owed, and credit history length. Typically, only inquiries from the past 12 months are considered, and they matter more if you have a limited credit history.

Inquiries are excluded from your score when:

  • A lender verifies your identity to offer you credit.
  • A lender reviews your account as part of an existing business relationship.
  • You check your own credit report.

Credit scores provide lenders with a quick, objective snapshot of an applicant’s credit report, helping them make loan approval decisions efficiently. This speeds up the credit granting process, allowing customers to access the credit they need more quickly.

Your credit score is calculated using a formula that assigns weights to different parts of your credit report. Credit bureaus looks at many factors, including:

  • How you pay your accounts
  • How much money you owe
  • How long your accounts have been open
  • The types of credit you use
  • How much credit you use compared to what’s available
  • How often and recently you’ve applied for credit

Different credit scores are used for various types of credit. For example, a lender might use one score for a credit card application and another for a mortgage application.