Understanding Canadian Credit Scores
If you’re someone who prefers to buy things with cash, you may not think that your credit score is important. Ask yourself: Do you want to own a home, buy a car, or apply for a good job in the next few years? If your answer is yes, then it might be time to start thinking about your credit score more.
What is a credit score?
Canadian credit scores are calculated by the two main credit bureaus, Equifax and TransUnion, based on the information in your credit report. Your credit score is a number between 300 and 900 that assesses your creditworthiness. It is calculated based on your credit history, which includes your payment history, credit utilization, and credit mix.
What makes a credit score important in Canada?
Credit scores are essential in Canada. Lenders, landlords, auto dealers, and even employers use them to make decisions about you. That’s why understanding Canadian credit scores is so important.
THE GOOD
Establishing financial credibility
“Having a high credit score could give you access to more favorable loans, credit cards and more.”
Capital One
Good credit depends on who looks at it, and that is exactly why understanding Canadian credit scores is important. Basically, if you have a good credit score, it is cheaper to borrow money. That is because you have established your creditworthiness with the credit bureaus. This will help you get approved for loans with better interest rates and have great credit card offers.
If you want to build a positive financial history and improve your credit score, you must consider these things:
- Make timely payments.
- Keep your credit utilization at 10% or below.
- Avoid many account openings.
- Always review your credit report.
Access to Credit and Loans
Are you a credit risk? Your funds need to have a specific purpose, either a new car or a home. That’s where the importance of credit comes into play. Understanding Canadian credit scores will give you a big picture of your financial future.
The specific terms of a loan or credit card offer, such as the interest rate, down payment, and loan term, will vary depending on the lender and the type of loan or credit card. However, in general, borrowers with good credit scores will qualify for the best terms and rates available.
Mortgage prices are soaring nowadays, and if you have a good credit score, you will save some big money. We are talking about hundreds of dollars saved on interest rates. This is because mortgage rates are typically lower for borrowers with good credit scores.
Lower Insurance Premiums
People with good credit scores are viewed by insurance companies as people who are less likely to file for insurance claims since they are more responsible or financially stable.
A good credit score can help you save money because you are rewarded with low interest rates. Do you have bad credit? Chances are, you’re paying a lot more on those loans.
THE BAD
High-interest rates and credit card offers
Lenders need to trust you in order to extend credit to you. People with lower credit scores are viewed as high-risk, which is why lenders charge a higher interest rate to compensate for the high risk of these people defaulting on loans.
On the other hand, credit card companies usually target people with poor credit. People with low credit scores or poor credit are more likely to accept these credit card offers that usually have insanely high interest rates, annual fees, and penalties. It is important that people understand Canadian credit scores in order to not fall into these “trap cards” and avoid fees that may help ruin your credit even more.
Difficulty in securing rental housing
Are you currently looking for a rental? Many, if not all, landlords in Canada run credit checks on potential tenants, and landlords tend to approve tenants with good credit scores because they are more likely to pay on time.
This may sound discriminatory and is against individuals with low credit scores who are currently looking for housing.
Understanding Canadian credit scores is key to taking steps to improve your creditworthiness. Taking these small steps will increase your chances of finding a new place to live.
Limited Employment Opportunities
In addition to impacting your ability to secure a rental property, your credit score can also impact your ability to get hired. Most employers in Canada run credit checks during the hiring process to assess the applicant’s financial responsibility and character.
That may sound discriminatory, but in the real world, low credit scores are often viewed as a reflection of financial irresponsibility or poor character. Understanding Canadian credit scores and how they work might just help you land a job.
THE UGLY
Identity Theft and Credit Scores
Identity theft is a serious crime that can have a devastating impact on your credit score, and it happens more than you think. When someone steals your personal information, such as your name, Social Security number, or credit card number, they can use it to open new accounts, make purchases, or even take out loans in your name. This can quickly lead to a decline in your credit score, even if you’re unaware of the fraudulent activity.
The Long-Lasting Impact of a Bad Credit Score
Credit is power, and a bad credit score can make it difficult to qualify for loans, credit cards, rentals, or even a job. It can haunt you for years. Understanding Canadian credit scores is definitely something to take seriously.
Building back your credit score is a process but this process will definitely give you more opportunities in the long run and it is possible. There are a few things you can do to improve your credit score, such as:
- Making all of your payments on time and in full
- Keeping your credit utilization ratio low. This means using no more than 30% of your available credit.
- Avoid opening too many new credit accounts in a short period of time.
- Disputing any errors or inaccuracies on your credit report
Credit score myths and misconceptions
There are many myths and misconceptions about credit scores. Here are a few of the most common:
- Myth: Checking your credit score will hurt your score.
- Fact: Checking your credit score does not hurt your score. You can check your credit score for free once a year from each of the two major credit bureaus in Canada, Equifax and TransUnion.
- Myth: You need to have a credit card to build a good credit score.
- Fact: There are other ways to build a good credit score, such as taking out a student loan or getting a secured credit card.
- Myth: Your credit score is the same with every lender.
- Fact: Lenders use different scoring models to calculate credit scores. This means that your credit score may vary slightly from lender to lender.
It is important to have accurate information on your credit report. Errors or inaccuracies can negatively impact your credit score. Understanding Canadian credit scores, reviewing your credit report regularly, and resolving any errors or inaccuracies immediately
How to Improve Your Credit Score
Regularly Check Your Credit Report
People don’t know how much regular monitoring of their credit report can do for their score. If you check your credit report regularly, you’ll see any errors, and you’ll know how to dispute them effectively.
If you find errors on your credit report, it’s important to dispute them right away. Understanding Canadian credit scores and how it works will help tremendously.
Pay Bills on Time
Your payment history is the most important factor in your credit score. Making all of your payments on time and in full shows lenders that you are a reliable borrower. Here are some tips for staying on top of your bills:
- Set up automatic payments so that you never miss a due date.
- Use a budgeting app to track your income and expenses. I recommend the EveryDollar budgeting app.
- Create a monthly budget that includes all of your bill payments.
- Prioritize your bills and pay the most important ones first.
- If you are struggling to pay your bills, contact your creditors to see if they can work with you to create a payment plan.
Reduce Credit Card Balances
If you’re doing everything you can but can’t seem to lower your credit score, your credit utilization might be the culprit. A high credit utilization ratio can also negatively impact your credit score.
There are strategies to lower your credit card balances. Here are a few tips:
- Pay more than the minimum payment on your credit cards each month.
- Prioritize high-interest credit cards.
- Consider transferring your credit card debt to a lower-interest balance transfer card.
- Avoid opening new credit cards until you have paid down your existing debt.
Avoid Opening Too Many New Accounts
If you open too many credit accounts all at once, lenders will see that you are struggling, especially if you do this in a short period of time.
Understanding Canadian credit scores is definitely something to take seriously during these instances and help you create a strategy before applying. Each time you open a new credit account, a new hard inquiry will be placed on your report, even if you don’t approve it. These hard inquiries are the culprit in lowering your credit score.
Bottomline
Your credit score is an important number that can impact many aspects of your financial life. It can affect your ability to qualify for loans, credit cards, and even rental housing. It can also affect the interest rates you pay on loans and other forms of credit.
Credit scores can be a good thing in that they can help you get access to the credit you need to achieve your financial goals. However, it is important to be aware of the potential negative aspects of credit scores. For example, if you have a low credit score, you may have difficulty qualifying for loans and credit cards, and you may pay higher interest rates.
It is also important to remember that credit scores are not perfect. They can be negatively impacted by factors such as identity theft or medical debt. If you find that your credit score has been negatively affected, there are steps you can take to improve it and understading canadian credit scores is one way to effectively help you.
- Important links:
- Equifax Canada: https://www.equifax.ca/
- TransUnion Canada: https://www.transunion.ca/
- Books:
- Credit Repair Toolkit: Fix Your Credit in 90 Days or Less by John Ulzheimer
- Credit Score Secrets: How to Get a Perfect Credit Score by Craig Stephens
- Credit Repair: Step By Step Guide On How To Improve Your Credit Score With Credit Repair Strategies (credit, credit score, Habits, Passive income, credit repair) by Kenny Johnson
- Articles:
- How to Improve Your Credit Score: A Step-by-Step Guide: https://www.nerdwallet.com/article/finance/raise-credit-score-fast
- Credit Scores in Canada: What You Need to Know: https://money.ca/managing-money/credit-score/the-ultimate-guide-to-credit-scores-in-canada
- Credit Repair Specialist:
