Credit Scores: What? Why? How?
Updated: Nov 2, 2021
What Is A Credit Score?
A credit score is a three-digit number, typically between 300 and 900, which is designed to represent your credit risk, or the likelihood you will pay your bills on time. It uses a formula calculated from your payment history, the number of credit accounts and their account balances, how long you have used credit, what different types of credit you have (credit mix), how much of the credit available you have used (credit utilization), how often you apply for a new credit card or loan, and if you have been in bankruptcy or collections.
Who Are The Credit Reporting Agencies In Canada?
The two Canadian credit reporting agencies are Equifax and Transunion Canada. Your credit account holder may report to one of these are both. Expect your payments on credit cards, loans (for vehicles, personal loans, lines of credit), purchase agreements (furniture, musical instruments, cell phones) to be reported to the credit reporting agencies.
How Do I Get My Credit Score?
Equifax will provide your personal credit score free of charge. You need to complete a request form, including a photocopy of 2 pieces of government-issued identification, mail the request, and wait for delivery of your report.
The link to request your Equifax credit report is https://assets.equifax.com/assets/canada/english/creditReportRequestForm.pdf
Transunion Canada also provides your personal credit score free of charge, through many of the online banking programs (i.e. Scotiabank, RBC). On your online banking dashboard, select my Transunion credit score.
Note: personally checking your own credit score will not affect the score
What Is A Good Credit Score?
Equifax Credit Scores & Ratings
CREDIT SCORE RANGE
300 to 560
560 to 659
660 to 724
725 to 759
760 to 900
TrasnunionCredit Scores & Ratings
CREDIT SCORE RANGE
300 to 692
693 to 742
743 to 789
790 to 832
833 to 900
Why Do I Need A Good Credit Score?
Most people rely on credit to purchase a house, a vehicle, use the convenience of credit cards or invest in a business (land, building, equipment, or working capital). It is much easier to qualify for loans or a credit card with a good credit score. If you have a higher credit score you may receive
Better terms and availability on loan products –The borrower is likely to have access to most loan and credit cards and will receive the best terms, including higher limits, to finance their purchase
Significant savings on interest rates – The borrower can get lower interest rates. For a large purchase, such as a house or car, a small difference in interest rate can save you thousands of dollars over the life of the loan
Access to the best credit cards –With the best rewards and the lowest interest rates, which can result in significant savings
Insurance discounts – The borrower may qualify for lower insurance premiums on homes or vehicles
More housing options – Approval for a housing rental, since some landlords consider a tenant’s credit score to determine if the tenant is trustworthy
Security deposit waivers on utilities – A utility company may consider your credit score to determine how likely you are to pay bills on time. A security deposit may not be required or lower to start utility services
How To Improve Your Credit Score
Timely payment of bills
Pay your bills on time
Make at least the minimum payment, even if you cannot pay the full amount
Contact the lender if you think you will have trouble paying a bill
Don’t skip payments if a bill is in dispute
Mind your credit limit
Don’t go over the credit limit
Try to use less than 35% of available credit. Increase your credit limit if necessary and use a lower percentage of available credit
Length of credit history
The longer the credit account is opened and used, the better your score. So don’t transfer all your old accounts to new accounts, since the new account is considered new credit.
Consider keeping an older account open even if you don’t need it and use it from time to time to keep it active
Limit the number of credit applications and credit checks
Try and limit the number of requests for credit. If there are too many requests, lenders think that the borrower is urgently seeking credit or living beyond their means
Limit the number of times you apply for credit. Some credit checks reduce your credit score
If shopping for credit (i.e. purchase of car or house) get your quotes from different lenders within a two week period since the inquiries will be combined and treated as a single inquiry for your credit score
Apply for credit only when you really need it
Use different types of credit
Credit scores are lower if you only have one type of credit product (i.e. credit cards only). It is better to have a mix: such as a credit card, a car loan, a line of credit