In Canada, your credit scores generally range from 300 to 900. The higher the score, the better. If you have scores between 800 and 900, you’re in excellent shape. They may be used to determine some of the most important financial factors in your life, such as whether or not you’ll be able to lease a vehicle, qualify for a mortgage or even land that cool new job. And considering 71 percent of Canadian families carry debt in some form (think mortgages, car loans, lines of credit, personal loans or student debt), good credit health should be a part of your current and future plans. High, low, positive, negative – there’s more to your scores than you might think. And depending on where your numbers fall, your lending and credit options will vary. So what is a good credit score? What about a great one?
Topics at a glance:
- What is a credit score?
- How are credit scores calculated?
- How to increase your credit score?
What Does Each score mean?
In Canada, your credit scores generally range from 300 to 900. The higher the score, the better. High scores may indicate that you’re less likely to default on your repayments if you take out a loan.
Below you’ll see a general breakdown of credit score ranges and what each range means in terms of your general ability to qualify for lending or credit requests, such as a loan or mortgage.
Note that the ranges can vary slightly depending on the provider, but these are the credit score ranges you’ll see on Credit Karma. The best way to know where your scores stand is to check your credit report:
- 800 to 900:Congratulations! You have excellent credit. Keep reaching for the stars.
- 720 to 799:You have very good credit! You should expect to have a variety of credit choices to choose from, so continue your healthy financial habits.
- 650 to 719:This is considered good to lenders. You may not qualify for the lowest interest rates available, but keep your credit history strong to help build your credit health.
- 600 to 649:This is fair credit. History of debt repayment will be important to demonstrate your solid sense of financial responsibility.
- 300 to 599:Your credit needs some work. Keep reading for some improvement suggestions below.
What information is kept in my credit file?
Your credit file contains information on all of your credit accounts submitted to the credit bureaus, including balances, limits, payment history, etc, as well as identification information such as your name, address, age, social insurance number, marital status, spouse’s name and age, number of dependents, occupation, and employment history.
How long is information kept on my credit file?
|Actual inquiries made by credit grantors||minimum of 3 years|
|Credit history and banking information||6 years from the last activity date|
|Bankruptcies||6 years from the date of discharge (1st bankruptcy)|
|Judgments, foreclosures, garnishments||6 years from the date filed|
|Collections||6 years from the date of last activity|
|Secured loans||6 years from the date filed|
| Credit Counseling, Consumer Proposals to creditors,
Orderly Payment of Debt (OPD), Voluntary Deposit information
|3 years from the date settled or completed|
What is a Credit Score?
In Canada, credit scores range from 300 (just getting started) up to 900 points, which is the best score. According to TransUnion, 650 is the magic middle number – a score above 650 will likely qualify you for a standard loan while a score under 650 will likely bring difficulty in receiving new credit.
Lenders who pull your credit bureau file may see a slightly different number than you see when you pull your own file. This is due to the fact that each creditor applies a specific set of risk rules, giving and taking points for different purposes or preferences. This proprietary method of scoring will make a difference in the final calculation. The score you pull for yourself is calculated using an algorithm created for consumers that approximates these different formulas, and should still be in the same numerical range as the lenders’ scores.
Order your credit report from both credit reporting agencies in Canada – Equifax and TransUnion – at least once per year for free (when requested by mail, fax, telephone, or in person), and you can pay to see your credit score if you choose.
How credit score is determined
In Canada, we have two companies that monitor credit and assign credit scores: Equifax and TransUnion. Any time you have credit — including loans, credit cards, and even things like utility bills — the companies you work with report to these agencies. The agencies plug this information into their proprietary formulas to come up with a credit score. The higher the score, the easier it is for you to get the credit you need.
There are five things that the credit bureaus are looking at. Here’s a list, along with a percentage that shows how much the bureau weighs this information:
- How often you pay bills on time (35 percent)
- How much you owe and what percentage of available credit you’re using (30 percent)
- How long you’ve had the accounts open (15 percent)
- Whether or not you’ve been applying for a lot of new credit (10 percent)
- Whether you have a mix of fixed and revolving credit (10 percent)
Clearly, the first two items are by far the most important. Fortunately, those are also the two things that you have the most control over.
What is a “good” credit score?
Credit scores range from a low of 300 to a high of 900, though it’s relatively rare to see anyone with a score at either end of the extremes. In general, the average credit score is around 600. If you have a score in this range, you’ll probably be able to qualify for loans and credit cards, but you’ll be offered high interest rates. 680 is the score you’ll need for a “very good” credit rating. This is the benchmark score insurers (and some lenders as well) use for mortgage qualifications amounts. With credit scores less than 680, your mortgage qualification amount might be impacted (reduced). Debt servicing ratio guidelines are tighter for credit scores less that 680. Usually, 750 is the score you’ll need for “excellent” credit. With a score of 750 or higher, you’re more likely to qualify for the rates you usually see advertised.
However, it’s important to note that each lender sets its own tiers for qualifying for different rates. If you’re on the cusp, you might get a much lower interest rate from a lender that has a generous cutoff. That’s why it’s always good to shop around.
How can a low credit rating affect my life?
In order to get a mortgage for your home, you need to have a good credit score. Even if they have excellent credit in their home country, new Canadians are often at a disadvantage here because they haven’t had the time to build up their Canadian credit score.
Credit scores are determined by a combination of credit history, on-time payments, credit mix, and credit usage. Lenders want to see whether you use the credit you have wisely and pay them back on time. Your credit score is a number that reflects how creditworthy you are.
It seems like a daunting task, but the good news is that a few things can make a big difference, and there are steps you can take to quickly increase your credit score so that you can qualify for a mortgage.
Credit scoring is used by lenders, insurers, landlords, employers, and utility companies to evaluate your credit behaviour and assess your creditworthiness.
- Applying for a loan. Your credit score will be a big factor into the decision of whether you are approved or denied your application for more credit. Your credit score will also affect the interest rate and credit limit offered to you by the new credit grantor – the lower your credit score, the higher the interest rate will be and the lower the credit limit offered – the reason for this is you are considered more of a credit risk.
- Applying for a job. A potential employer may ask your permission to check your credit file and based on what they read, they may decide not to hire you due to your poor credit history. Yes, having bad credit could cost you a job!
- Renting a vehicle. When you sign an application to rent a car, the rental company can check your credit history to determine what their risk may be when they loan you their property. So although you are not applying for credit, the application documents you sign provide your written permission to access your credit information.
- The same is true when applying for rental housing – the landlord may assess your tenant worthiness and their risk by factoring in your credit rating and score, and they could pass you over for someone with a better credit rating.
What information is used to calculate my credit score, and what factors will lower my score?
If you have tried looking on the consumer reporting agencies’ (CRAs, also know as Credit Bureaus) websites, you have seen they provide VERY little information as to how your credit score is calculated. They believe this information is proprietary and therefore their “secret”. They do, however, provide a list of the main factors which affect your credit score:
- Payment History
Equifax says: “Pay all of your bills on time. Paying late, or having your account sent to a collection agency has a negative impact on your credit score.”
TransUnion says: “A good record of on-time payments will help boost your credit score.”
Equifax lists: “Serious delinquency; Serious delinquency, and public record or collection field; Time since delinquency is too recent or unknown; Level of delinquency on accounts is too high; Number of accounts with delinquency is too high”
TransUnion lists: “Severity and frequency of derogatory credit information such as bankruptcies, charge-offs, and collections”
- Balance-to-Limit Ratio
Equifax says: “Try not to run your balances up to your credit limit. Keeping your account balances below 75% of your available credit may also help your score.”
TransUnion says: “Balances above 50 percent of your credit limits will harm your credit. Aim for balances under 30 percent.”
Ok, so avoid maxing out your credit – because if you don’t really need more credit you’ll be able to get it, and if you do really need it then you are more of a risk.(Funny how that works)
- Recent Inquiries
Equifax says: “Avoid applying for credit unless you have a genuine need for a new account. Too many inquiries in a short period of time can sometimes be interpreted as a sign that you are opening numerous credit accounts due to financial difficulties, or overextending yourself by taking on more debt than you can actually repay. A flurry of inquiries will prompt most lenders to ask you why.”
TransUnion says: “Avoid excessive inquiries. When a lender or business checks your credit, it causes a hard inquiry to your credit file. Apply for new credit in moderation.”
There are two types of Credit Bureau file inquires: “hard inquiries” such as an application for new credit, which will lower your score; and “soft inquiries” such as requesting your own credit report, and businesses checking your file for updates to your existing credit accounts for approving credit limit increases, for example – these will not appear on your file or lower your credit score.
Although a “flurry of inquiries” may indicate financial difficulties, it could also be that you are moving to a new city, and will need to apply for a new mortgage, a new electric/gas account, cable, phone and other utilities accounts. These “inquiries” into your account will deduct points from your score, so you may take a rather large hit (points wise) on your credit rating for moving houses.
Also of concern is that inquiries for non-credit purposes (such as utility companies and car rentals), will cause your credit score to drop without adding points for having credit in good standing, as with a credit card that you pay off every month. So be careful to only apply for credit you really need.
- Length/history of Accounts
Equifax says: A “common negative score factor… [is the] length of time accounts has been established is too short”
TransUnion says: An established credit history makes you a less risky borrower. Think twice before closing old accounts before a loan application.”
Having a longer history on your credit accounts earns you more points, so avoid closing your accounts if you may need them in the future. A good credit history is built over time – sorry, but there is no quick fix for this one.
- Variety of Credit Accounts
TransUnion says: “A healthy credit profile has a balanced mix of credit accounts and loans.”
Having a mix of credit products (credit card, retail store card, line of credit, car loan, etc) will procure more points on your file than having only one type of credit, such as only credit cards.
- Too many accounts
Having a lot credit accounts, especially if many of them carry balances, is another warning sign of financial distress, so if the Credit Bureaus think you have too many, they will deduct points.
Other “derogatory” factors which negatively affect your credit rating and the Credit Bureaus don’t like to mention to you are:
One of the major causes of point loss to your credit rating are bureau reporting errors. (They can also cost you financially as shown in the CBC report on credit reporting mistakes) Errors can be delinquent accounts reporting on your file that do not belong to you, late payments that were not late, and credit that is created from identity fraud – therefore not your credit. The Credit Bureaus are paid by the creditors who pull credit bureau files and in turn who report to them. Credit reporting is done electronically, and Credit Bureaus accept the information they are sent without any investigation into the accuracy of the information. Therefore, is it critical that you pull your credit bureau file at least once every year. Only you will know when there is an error on your file, and it is up to you to have the credit bureaus fix it.
Look for these common errors:
- Wrong mailing addresses
- Incorrect Social Insurance Number
- Signs of identity theft
- Errors in your credit accounts
- Late payments
- Unauthorized hard inquiries
If there is an error on your file you must contact the Credit Bureau, then it is up to the Bureau to investigate your complaint and to verify the information contained in your file by contacting the reporting creditor. When contacted by the Credit Bureau, the reporting creditor will have to verify the item they have placed on your file. You are entitled to be part of that process.
Check your credit again 30-60 days after disputing errors. If any of the disputed inaccuracies remain, contact the creditor to further your dispute and determine if the item can be taken off your credit profile. If you want to tell your side of the story, forward a written request to the credit reporting agency to have a consumer statement added to your credit file.
- Moving/Time at Address
As previously discussed, a large number of credit file requests within a short period due to moving will lower your credit score. But on top of that, the length of time at your current address will influence your score, so try not to move a lot as it will affect your credit rating. The longer you remain at one address, the more points you receive.
- Changing jobs/employers frequently
The longer you stay at a job, the higher points your credit score receives. You are seen as having a secure job and therefore being a secure, less risky credit consumer.
- Having no mortgage, or no housing information on your file
The Credit Bureaus assign certain points for those who have mortgages and those who rent, and deduct points for those whose housing situation is unknown to them. As soon as you pay off your mortgage, the reporting account is removed from your file and you are in the unknown category, which will actually remove points from your credit rating! Credit card and other credit account history will remain on your account even after being paid off and closed, but unfortunately a paid mortgage does not benefit your credit rating. Imagine, you own your own home and that does not benefit your credit rating – does that even make sense? Also, not all mortgages report to the Credit Bureaus.
- Having high revolving credit balances
When you have high balances that are rotating between different credit accounts, this is a warning sign that you could be in financial trouble and therefore you could be considered a credit risk.
- Having no debt
Believe it or not, having no debt is bad for your credit score! Here we go again – if you don’t need to borrow money creditors will be trying to throw it at you. If you do need to borrow money and have no debt or debt history well, you will have a harder time of it. If you do not have a history of credit use on your file to provide something for creditors to evaluate, they will see that as a risk, and you will be deducted points on your score for not having credit accounts.
What if you have a bad credit score?
Your credit score determines interest rates, which in turn affects how much you’ll be able to borrow. If your score is low, you may have a hard time getting a mortgage that’s enough to buy the home you want. Fortunately, you can work to improve your score, and even small changes should start showing immediate improvements.
First, make sure that you’re making minimum payments on time. If you’re forgetful, it can be helpful to set up automatic payments so that you don’t have to think about it. If you’re worried about not having enough money in your account, you should plan to make your payments on payday. Since these on-time payments count as 35 percent of your credit score, doing this will make a big difference.
You’ll also want to focus on paying down your debt to decrease your debt ratio. This counts for 30 percent of the score, and getting rid of debt will increase your score. Eliminating your debt can also increase the amount a bank will loan you for your mortgage.
Keep doing these two things consistently. Negative marks on your credit — such as late payments — drop off your account after only six years, though bankruptcy takes seven years to disappear after discharge. If you stay focused on keeping your debt low and paying bills on time, you’ll eventually have a credit report that looks as though you’ve always been perfect.
How To Raise Your Credit Score:
- Correct errors, and track your report for future errors. Order your credit file from each bureau at least once per year.
- Get a credit card. The credit bureaus need to see you can use credit responsibly. While it seems like it makes more financial sense to pay with cash, you’re better off getting a credit card. Many banks have special programs for newcomers that include getting a credit card to build up credit.If you’re having trouble getting a credit card, you can apply for a secured credit card. With this type of card, you pay a deposit, and that deposit becomes your credit limit. For instance, if you pay $500, you’ll have a $500 credit limit. It’s not ideal, but it can be a good way to build up your credit.
- Lower your balances. If your debt levels are above 50% of your available limit, create a payment plan to reduce your balances.
- Make on-time payments. The biggest “tip” to having a good credit rating and a high credit score is to continually use credit and to repay that credit on time all the time. The most important thing you can do to raise your credit score is to make your payments on time. Any time you’re late, the lender reports that to the credit bureaus, and that late payment can stay on your report for seven years. To prevent this from happening, consider setting up automatic payments.
- Pay your balance off in full. Credit cards charge interest whenever you don’t pay the balance off in full. As a newcomer without a strong credit history, you’ll probably only qualify for credit cards with high interest rates. The good news is you don’t need to carry a balance in order to build up your credit! The lender reports your on-time payment to the credit bureaus whether you pay the minimum due or the full balance. By paying the full balance each month, you can avoid those interest charges. This is one of the smartest ways to build up credit.
- Avoid maxing out your credit. The credit bureaus also pay attention to the percentage of available credit you’re using. If you’re using a high percentage, your credit score will be lower. Ideally, you don’t want to get close to your credit limit. First-time credit cards typically have low balance limits, so this can be a challenge. If your credit limit is only $1,000, avoid making large purchases on the card even if you can afford to pay it off when the bill comes. Instead, make small purchases or use it for groceries and make a payment shortly after so you’re not using too much of your credit. If you do need to make a big purchase, make sure you can make a payment before your next billing date so it’s cleared off the balance.
- Ask for a credit limit increase. We just mentioned that using a smaller percentage of your credit limit will increase your credit score. One easy way to do this is to have your limit increased. If you’ve had your card for a few months and you’ve been making on-time payments, you can ask the company to increase your limit. This can have a big effect on your score. Ultimately, it takes years of good behaviour to build up an excellent credit score, but these small steps will put you on the right track. In no time at all, you’ll have a score that will help you get the mortgage you need for your first home in Canada.
- Buy a Car with an Auto Loan. The credit bureaus like to see a mix of revolving credit (like a credit card) and installment loans, where you borrow a set amount and make steady payments over a few years. Car loans, student loans, and mortgages are all examples of installment loans. If you’re new to Canada, you probably need a way to get around, so you should consider buying a car. Even if you have the cash to buy the car outright, it’s a smart idea to take out an auto loan and make payments on that loan for a year or two before paying it off. Auto loans typically have low interest rates, so you won’t be paying too much additional money.
- Look over our list, read your credit report, and identify any areas that could be improved for a higher credit rating.
Remember, “your credit rating is not a reflection of your personal worth – it is merely a credit reporting tool” – Margaret H. Johnson. The good news is your credit rating is like your self-esteem, sometimes in your life it will be high and sometimes it will be low – however, you can always rebuild it over time!
Buying a Home in Canada? Why a Good Credit Score Matters
It’s a fact that for most people, buying a home requires a good credit score. In Canada, home valuations are rising across the country, and in desirable markets you could be looking at a home cost in the high six figures, and it’s rising rapidly. Without a briefcase full of cash, you’ll need a loan to help make that mortgage work, and that also means having a good credit score to buy a house in Canada.
But when you work with lenders and try to secure financing for that purchase, you’ll be scrutinized for your financial standing, and one of the most crucial qualifiers is that all-important credit score. Sure, you’ll need to prove your income and have the down payment ready, but you’ll be financing a majority of that purchase, and your credit score will dictate the loan you’re able to get, as well as that percentage rate that can save you money over the long run.
Qualifying for a mortgage
First off, the bank looks at your score to determine whether they want to loan you money or not. Those with low credit scores will not qualify for mortgages. Cutoff ranges vary from bank to bank, so if you’re turned down by one bank, you still stand a chance of getting a mortgage from another bank. However, you may need to spend a few years building up credit before you can get your mortgage.
Sometimes, your score is low, not because you’ve made a lot of mistakes, but because you don’t have a long history. This is particularly true for those who are new to Canada. We’ll talk more about this later, but it’s possible to build your score relatively quickly.
Determining your rate
Perhaps more importantly, the bank uses your credit score to determine the interest rate you pay on your mortgage. Only those with excellent credit will get the low scores that you see advertised. Those with good or average credit may pay one or two percentage points higher than the published rates.
What does this mean for you? It depends a lot on the type of home you’re buying, but the higher the interest rate, the higher the monthly payment. In many cases, the difference between rates offered to people with mediocre credit can mean a payment that’s $100 or more per month. Over time, this results in paying tens of thousands of dollars more in interest.
Most banks have credit ranges that they use to determine the rates. For instance, they might give those with credit scores higher than 800 the best rates; those with scores between 700 and 800 a slightly higher rate; and those with scores between 600 and 700 an even higher rate. Compare your score with the bank’s ranges. If you’re close to the score cutoff for a better rate, you may be able to get a better overall deal if you can boost your credit score by those extra points in just a few months. Alternatively, your score might qualify you for a better rate at a different bank if they use different credit ranges.
What Credit Score Is Needed To Buy a House in Canada?
In fact, if you have a high credit score, you could save a small fortune over the life of your loan. That’s why many homebuyers are preoccupied with this little number that can make or break your mortgage. But a good credit score in Canada when it comes to buying a home can be different things to different people. One lender may need an ultra-high credit score to make a purchase work while another may be able to get by with a more moderate one.
That said, credit scores range from 300 on the low end to 900 on the high end. Traditionally, a poor credit score is between 300 and 560, with fair credit sitting in the 560 to 660 range. A good credit score in Canada is between 660 and 725, and very good is between 725 and 760. A great or excellent credit score is above 760 all the way up to 900.
Generally, the higher your credit score, the easier it is to get approved for loans and other financial products — and if you have a score above 650 (good) or 750 (excellent) you’ll qualify for a bigger loan at a better rate than if you had a lower credit score, all things being equal.
A good credit score in Canada is generally somewhere in the 600s. Technically, for most lenders it’s above 640, but some lenders may qualify you for a loan even if your credit score is lower — like 620 — even though other lenders may require a credit score upwards of 700.
Aside from a good credit score, you may also increase your chances of getting a better loan if you have a high income or low debt. Other things that can influence the loan you qualify for include the loan amount and the term of the loan, whereby longer terms and higher loan amounts will need a higher credit score to match. That’s because higher loan amounts and longer terms are riskier for lenders, so they require a better credit score to reduce the chances that there will be any problems during the lifetime of the loan.
If a loan includes interest rates that rise in the future, more stringent checks may be needed to ensure that the borrower can afford the loan once it kicks into the higher rates. This is known as a mortgage stress test, and it’s federally regulated for lenders, even if the buyer puts more than 20 percent down.
What Else Do Lenders Look At?
Aside from a good credit score, lenders in Canada look at all sorts of factors before deciding on whether to grant that loan. While your credit score points at your financial history, it isn’t the whole story, and you’ll likely need to supply other pieces of your financial life before you can qualify for that loan. In addition to your credit score, lenders will likely pull a credit report to examine your financial record.
You may also need to supply your income (pay stub or bank account statement), your employment record (which may include talking to a superior at work) and your monthly expenses and debt (including any existing loans), which will all be weighed against the entire amount you’re asking to borrow and the term of the loan. It’s also where the federally mandated stress test comes into play, and in order to qualify for your loan you’ll need to be able to prove that you’ll be able to pay your loan, not just today but well into the future.
By calculating your monthly living costs, what you bring in and the debt that you’ll be taking on, your lender can determine whether the loan is a good fit or whether you’ll need a different type of loan or rate. It’s not quite as valuable as a good credit score, but your gross debt service ratio is basically a measurement of what you’re spending each month currently and whether you’ll be able to absorb the costs of your mortgage over time.
Staying on top of your credit report
While our tips so far will help you improve your credit score, there’s one more thing that you need to watch out for: errors. Sometimes, credit scores are artificially low because there’s been a mistake in the reporting process. If this is true for you, simply fixing the mistake will mean a big increase in your score.
You can request copies of your credit report from each of the credit bureaus. You’re entitled to one free report each year. Note that these reports only show things like how much you owe and whether or not you’ve been making your payments on time. It will not show your actual credit score. Even without the score, though, you can look for and fix any mistakes.
You don’t want to have any problems financing the home of your dreams, so it’s smart to start thinking about your credit score. The earlier you start taking responsibility, the better your score will be when it’s time to buy a home.
Additional Helpful Resources:
- What information is kept on my credit file?
- How long is information kept on my file?
- What is a credit “score”?
- How can my credit score affect my life?
- What factors affect my credit score?
- How do I raise my credit score?