At Credit Canada, we’ve been busy working with clients whose finances (and credit score) took a big financial hit due to the pandemic. However, I’ve also found that many callers are looking to use this time as an opportunity to focus on personal growth. One financial aspect of their lives that many are trying to accomplish is rebuilding credit. Now, there’s a lot of information online about how to rebuild a credit score (including our blog on COVID-19 and credit scores), so I wanted to give you a conceptual overview of credit scores to help filter out fact from fiction.
View Your Credit Score Based on Its Category, Not as a Number
In Canada, scores range between 300 and 900, based on payment history, credit utilization, length of credit history, credit diversity, and number of hard inquiries. There are two credit bureaus, Equifax and TransUnion. Each company uses different credit score score calculations so it’s common that a score from Equifax may not be the same as your score from TransUnion. It’s also normal for credit scores to decrease or increase slightly, so think of yours in terms of what category yours falls under. Whether you’re just starting out with credit or looking to rebuild credit, this can help!
Credit Score of 300 – 560
It’s best not to apply for credit with a score in this category because you will likely be declined. When a lender checks your credit score, they’re looking for how likely you are to pay your bills. A score in this category signals to potential lenders that you are very likely to default on payments, and it won’t matter if your score is 320 or 550. There’s a chance you may qualify for a loan with a non-bank lender but be prepared to pay mega interest.
It’s important to know that you cannot pay to rebuild your credit so getting that first credit card could remain elusive. When clients in this category ask me “what is the easiest credit card to get with bad credit?,” I always tell them to get a secured credit card. A secured credit card requires a deposit which is usually held for one year. At the end of the term, providing you have used the card responsibly, your deposit will be returned and the card will be reverted to a regular credit card. At this point, continue to use the card and pay your bill in full every month. You’ll know your score is improving as you are offered credit limit increases. The best time to get credit is when you’re offered it, so take the credit limit increase if you know that you will continue to use the card responsibly.
Many of the clients I work with at Credit Canada are in this category. This category is considered “bad credit” but that does not mean that you are a bad person. Most people in this category are here because life threw them a curveball such as job loss, illness, divorce, or family crisis. Very few people are in this category due to willful neglect.
Credit Score of 561 – 660
You’re getting there. In this category, the goal is to continue using the credit that you have and being diligent about keeping your balances as low as possible. The longer a credit account is open and in good standing, the higher your credit will be. The credit account that has been open the longest is the one that will be getting you the best return on your credit score. Again, your score is all about how risky you are and the longer you’ve had an account with no missed payments, the less likely you are to default.
If you’re in this category but you do not have a credit card, you may qualify for one with your bank. While there’s no surefire way on how to increase your credit score quickly, obtaining a credit card can help. It’s important to know that too many applications for credit reduce your score. So, if the bank you deposit your paycheque at will not approve you for credit, chances are another bank that you have no relationship with will not either. Rather than hurt your score with more applications, choose a secured credit card, as they are among the best cards for rebuilding credit.
Credit Score of 661 – 725
You’re over the worst of it! Now that you’ve made it to the “good credit” category, remember to keep your credit balance well below the limit. A good rule is to keep your balance below 30% of your credit limit—but the lower the better. That will ensure speedy arrival to the next category.
Credit Score of 726 – 760
Very good, you know what you’re doing! Now, your sales-focused banker is dying to give you credit. Keep in mind that your cell phone contract is reporting on your credit report. Cancelling a phone contract because you had a tiff with your cell phone provider and then refusing to pay the cancellation fee because you don’t think it’s fair is one of the biggest issues I see with bad credit not related to traditional credit products.
Credit Score of 761 – 900
Excellent! This category will get you the most competitive interest rates against a Prime rate of 2.45% You likely have a wide range of credit products that have been open for a long time and you always make your payments on time.
Even if you don’t have that perfect credit score of 900, at this point, you may not even think of your credit score anymore because anything over 760 is excellent, but it’s still important to get a copy of your credit report once per year to make sure there are no errors. You can get a free copy from Equifax or TransUnion. It’s good practice to check both. Alternatively, most banks are now offering free access to your credit report via your online banking app which will include your score.
Need Help Rebuilding Credit? Credit Canada Can Help!
Still have questions about understanding your credit score? Did COVID-19 impact your credit score? Or maybe you’re looking for advice on rebuilding bad credit in order to plan for a future purchase. Whatever your need, Credit Canada can help.
Our certified Credit Counsellors can provide you with free advice on how to approach your creditors and how to take advantage of their relief offers in ways that won’t impact your credit score, or at least minimize the impact. They’re also available for free financial advice and tips for managing your money and debt. Contact us today to talk confidentially about your debt situation or our credit rebuilding programs.
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