If you’ve ever tried to open a line of credit with your bank, apply for an auto loan, or sign up for a mortgage, you have probably heard the term “credit score” before. Many organisations will check your credit score and may provide favourable treatment if you have a good credit score.
What is a good credit score in Canada? In today’s blog, we’ll discuss credit scores and how they can affect your finances.
What Is a Credit Score?
A credit score is a number that companies use to try and predict how likely it is that you will pay your bills on time. It is an estimate of how “reliable” you are as a debtor.
The higher your credit score is, the better. High credit scores tell lenders that you are extremely good about paying your bills on time and are a “safe” investment for lending money to. Meanwhile, low credit scores tell lenders that you’re a “high-risk” proposition, so they’ll be less likely to want to work with you.
If you want to know what your current credit score is, you can usually check it through a credit bureau such as Equifax or TransUnion.
What Is a Good Credit Score?
Credit scores range between 300 and 900 — with 300 being the lowest score and 900 being the highest. Different credit bureaus may report different scores depending on what events they have information about and how they establish their scores.
The determination of what a good credit score is may vary from one bureau to the next. For example, if you’re wondering “what is a good credit score with Equifax,” they typically consider any score above 660 to be “good.” Meanwhile, a score above 760 is considered “excellent” by Equifax.
Why Does Good Credit Matter?
Many people go for years without knowing if they have a good credit score or not. So, if your credit score is something you don’t use or need on a daily basis, why does having good credit matter?
The short answer is that, while you might not look at it on a daily basis, your credit score matters because there are a lot of people and businesses that will look at this number — and make decisions about you based on what they see.
Some examples of situations your credit score might have an influence in include:
Getting Approved for Any Kind of Loan or Mortgage
Whether you’re looking to get a home mortgage, buy a car to get you to and from work, or get a consolidation loan to cover your existing debts, your credit score will play a big role in how the lender treats you. If you have a high score, you’re more likely to get preferable treatment such as lower interest rates or the ability to borrow more money to cover all of your costs.
“What is a good credit score for a mortgage,” you ask? Generally speaking, if you’re looking to get a mortgage in Canada, you’ll want a credit score of at least 780. Having a score this high would make applying for a mortgage relatively easy and motivate lenders to give you favourable terms. However, a good credit score range between 700 and 780 would still be acceptable. Below that number, you may face difficulty in finding a lender.
For example, say that two people are applying for a mortgage on a home worth $400,000. One person has great credit while the other has poorer credit. Person A (the one with a good credit score) is offered a 5-year mortgage with a 2.09% interest rate. Meanwhile, Person B can only secure a 10-year mortgage with a 3.24% interest rate.
To simplify the math, let’s just assume that the interest isn’t compounding and the balance remains constant for both mortgages — neither growing nor shrinking since each borrower is paying just the interest (somehow). In five years, Person A pays $41,800 in interest. Person B ends up paying $129,600 in interest over ten years. Basically, the person with the lower credit score ended up paying three times as much in interest because their score didn’t qualify them for the shorter, lower-interest mortgage.
Renting an Apartment
Landlords will want to know that they can trust you to pay your rent on time, every time. So, they will check your credit score to see how reliable you are. If your score is too low, they may deny your rental application in favor of someone with a better track record.
Alternatively, a landlord might ask a tenant with poor credit for more rent up front. For example, instead of asking for a deposit for just the first and last month, the landlord might ask for four months’ rent all at once to limit their risk of losing out on rent payments. This could make it more difficult to find an affordable apartment.
Getting New Credit Cards
If you have good credit, credit card companies will want to entice you to open an account with them. So, they’re more likely to offer low interest rates and higher spending ceilings if you have a good credit score.
These are just a few examples of situations where having a good credit score could make a major difference in your life.
Common Credit Score Myths
When it comes to credit scores, there is a lot of misinformation that can make it tougher to sort out the good advice from the bad. To help you avoid this misinformation, here’s a short list of credit score myths to know:
- You Only Have One Credit Score. This is untrue. Each credit bureau will use its own scoring algorithms to measure your score — and some bureaus may be missing information that could positively or negatively impact your score. For example, depending on which bureau does the measuring, your credit score could fluctuate between 741 and 831.
- All Credit Inquiries Impact Your Credit Score. While checking your credit history is logged on your file as an “inquiry,” not all inquiries will hurt your credit score. Typically, it’s the inquiries that are part of you actively seeking new lines of credit (or credit increases) that will affect your credit score calculation. Even then, it generally takes a lot of inquiries to have a significant negative impact on your score. So, feel free to check your credit score at least once every year!
- Credit Scores and Credit Ratings Are the Same. While both credit score and credit ratings can be used by lenders to assess the risk you pose, there is a difference. A credit rating serves to highlight your payment history for a specific debt (such as a mortgage, car loan, or credit card). Meanwhile, credit score is an indication of how likely you are to repay your debts based on your past actions.
- Debt Consolidation Will Permanently Ruin My Credit Score. Joining a debt consolidation program (DCP) does not mean that your credit will be permanently ruined. While some debt counselling services such as a DCP may impact your credit for a while, the drop isn’t permanent and you can rebuild your credit with consistent good behaviour after completing your DCP.
- I Can Pay to Have Someone Fix My Credit. There are a lot of companies that might advertise that they can fix your credit score or repair it for a fee. However, a company cannot just remove the legitimate negative events on your credit history (if there are erroneous entries in your history, then those can be removed). Rebuilding your credit is a long and time-consuming process, so be wary of scam artists that offer to “fix” it if you just pay them some money to process the paperwork.
How to Get a Good Credit Score
Still wondering how to get a good credit score? Fair warning: it will take a lot of time and effort to build a years-long history of good credit to really maximize your score. Generally speaking, there are five things that the credit bureaus in Canada will look at when setting your score:
- Debt Payment History. How often you make payments on time versus missing payments on your outstanding debts.
- Credit Utilization Rate. A measure of how much credit you have available vs how much you’ve used. For example, if you have $50,000 in credit and have used $25,000 of that limit, your utilization rate would be 50%.
- Length/Age of Your Credit History. How long you’ve held credit. Generally speaking, the longer your credit history, the better.
- Credit Mix. The diversity of the credit you have between installment loans (such as auto loans), revolving credit (i.e. credit cards), and mortgages.
- Number of Inquiries. A measure of how frequently you’ve applied for different kinds of credit. Numerous inquiries in a short time frame can indicate that you have money problems.
Credit bureaus may weigh each of the above credit history items differently when calculating your score, but the top two factors are generally debt/bill payment history and credit utilization rate, in that order.
So, the best way to build a good credit score would be to make consistent payments on a variety of debts and to keep your credit utilization rate as low as possible (under 30% is ideal). As for “age of credit history,” that’s something that can only be built up with time. By keeping to a tight budget and not overextending yourself, you may find that you’ve entered a good credit score range before you know it!
Need Help Dealing with Debt?
Even the best budgeters and most successful people can easily find themselves falling into debt through no fault of their own. Whether it’s because of a sudden job loss, injury or illness, or a thousand other situations, misfortune can put the best of us behind on our debts with little to no warning.
If you find yourself in a situation where you need to deal with debt but don’t have a good enough credit score to qualify for a debt consolidation loan from a bank, consider reaching out to a credit counselling agency for help.
Credit Canada is here to provide you with advice on improving your credit score, paying down or eliminating your debt, and other debt management services that others have used to resolve millions of dollars in debt in the past. Reach out to our Credit Counsellors to get help now!