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One of the most frustrating things about credit scores in Canada is that there isn’t a standard scoring system for each person. Equifax and TransUnion are the two main bureaus in Canada and they each have their own proprietary methods of scoring credit files.
Further, the bureaus aren’t working with the exact same information. Some lenders only report payment data to one of the bureaus and most lenders will do credit inquiries with only one bureau.
For example, if you applied for financing at one of the major banks, they may only check your TransUnion file, so the inquiry will be listed on your TransUnion file and not your Equifax file and, as you’ll see below, credit inquiries are one of the factors that impact your credit.
To make things even more complex, each of the bureaus may have a number of different types of scores that they supply to banks and lenders - so your TransUnion score from one lender could be different from your TransUnion score at another lender. The end result is one person could have a handful of different scores from both credit bureaus.
So knowing all this, how can you ensure you maintain a good (or great) credit score with all models and bureaus? Let’s start by exploring the credit score ranges.
What your credit score means
In Canada, credit scores range from 300 to 900. Where your number falls in this range will determine whether or not you qualify for certain loans, as well as the interest rates you’re offered.
According to the credit bureau Equifax, credit scores over 659 are generally considered to be good and credit scores over 759 are excellent. Anything in the 300 to 559 range is usually considered poor.
Typically, if you have a high score you can expect to qualify for low-interest rates. Conversely, if you have a poor credit score you’ll likely struggle to qualify for new loans at all.
These are broad guidelines, however, and there’s no consensus on the precise line between poor and good, or good and excellent. Even still, these ranges give you a decent idea of your credit score’s overall standing.
How are credit scores calculated?
TransUnion and Equifax follow roughly the same formula when they calculate credit scores. The number you receive is based on a blend of your financial information, including things like how often you pay your bills on time.
There are five main factors that credit bureaus use to determine your credit score.
1. Payment history
How often you pay your bills on time is the single most important factor that goes into your credit score calculation. It’s also the one you theoretically have the most control over. A history of late payments will damage your credit score and making your payments on time will help you build credit.
2. Credit utilization
Your existing debts are also a hugely important factor in your credit score. In particular, your credit utilization ratio (how much revolving credit (credit cards, lines of credit, etc.) you’ve used vs. how much you have available) is a factor. A high ratio will damage your credit score.
3. Credit history
The length of time you’ve been using credit is another factor. If you have no credit history or a very short one, this will lower your credit score, as lenders have less information to measure your creditworthiness.
4. Inquiries
Any time a hard check is run on your credit score, this shows up on your credit report. This is especially true if you have a high number of hard inquiries in a short period of time. You’ll learn more about inquiries below.
5. Public records
A history of bad credit or financial hardship will also negatively impact your credit score. For instance, if you previously filed for bankruptcy or had several debts go to collections. The good news is this typically only accounts for around 10% of your credit score calculation.
How can I get a good credit score?
There are steps you can take immediately to begin repairing your credit and improve your credit score. It might not happen overnight but if you follow some of these tips your credit score will start to improve.
I. Pay all of your bills on time
If you want to improve your credit the single most important thing you must do is ensure you pay every single bill you have on time and in full. No exceptions. Every late or missed payment, no matter how small, negatively impacts your credit score. Conversely, every bill paid on time and in full improves your credit score. This doesn’t mean one on-time payment offsets one late payment either. Creditors want to see a long pattern of bills paid on time, in full.
II. Keep your credit utilization under 30%
Credit utilization is a key factor in determining your credit score. It gauges your ability to manage credit by dividing the sum of your outstanding credit card balances by the sum of your available credit. For example, if you have two credit cards with a $5000 limit on each card and a balance of $2,500 on each card, your credit utilization is 50%. If you’re constantly maxing out your cards, your credit utilization is 100%, and that’s not good. It’s important that you keep your credit card balances low (preferably under 30%). It means paying off more than your minimum payment every month or, if possible, paying it all off.
III. Apply for credit selectively
Anytime you apply for new credit, lenders will ask your permission to see your credit report to check your eligibility. This is called a hard inquiry. Too many hard inquiries in a short period of time can reflect poorly on your credit report because it can indicate financial hardship. Therefore, it’s wise to only apply for loan products that are most essential and beneficial to your personal finances.
Learn more about hard credit checks versus soft credit checks.
IV. Keep a healthy credit mix
A healthy combination of instalment and revolving credit indicates sound money management. Institutions have more confidence lending to borrowers who prove they can maintain a diverse mix of credit (car loan, personal loans, mortgage, credit cards, etc.) This is why experts will tell you not to cancel unused credit cards as it not only affects your credit history but could diminish a well-balanced credit mix too.
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If you don't know your credit score, the first step to good credit is checking your credit score. Fortunately, you can do that online in a couple of minutes!
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