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Worried about your credit score? Having bad credit can affect your future potential for securing a mortgage, a car loan, or even a credit card.
Your credit score matters. This is what lenders use when deciding whether or not they want to loan you money. It’s also used to determine the terms of your loan, including what interest rate you can secure. Sometimes employers will pull your credit score when hiring for a new job or a potential landlord when you rent a house.
If you have a bad credit score, there is hope. There are steps you can take to rebuild your credit and get to the place you want to be. However, before you can get there, you need to know where you are going. What is considered a “good” credit score?
This article will outline what a good credit score is, why it’s important, and how you can work towards improving your score.
What is a Good Credit Score?
A Canadian credit score is a three-digit number that ranges between 300 and 900. Credit scores are calculated by two main credit bureaus, Equifax and TransUnion. A score of 300 is classified as poor while a score of 900 is excellent.
Canadian credit scores:
Note that there is some variation in the exact numbers based on the source. Here is an example of Canadian credit score ranges from the Government of Canada website.
- Poor: 300 to 559
- Fair: 560 to 659
- Good: 600 to 724
- Very Good: 725 to 759
- Excellent: 760+
The average Canadian credit score is currently 667. The Canadian average is up 18 points from the previous year. Much of this increase can be explained by a change in spending and saving habits during the COVID-19 pandemic. For many, a combination of government relief measures and improved financial habits helped to increase credit scores. However, this is not the story for everyone. There are still many Canadians with poor credit scores who are struggling to make an improvement.
For those dealing with a poor credit score, trying to rebuild credit can feel like a vicious circle. To get ahead, you need to make your full payments on time. However, those with low credit scores are also the ones being dinged with the highest interest rates, making it difficult to afford the payments. Poor credit also makes it hard to consolidate debt because many lenders will decline you based on your score.
Why is Your Credit Score Important?
At one point or another, most Canadians have to borrow money from a lender. Whether it’s for a mortgage to buy a home, a car loan to finance a vehicle, or a student loan to support an education. Before a lender will give you any money, they want to know how likely you are to pay them back, which is where the credit check comes in.
When you apply for a loan, the lender will typically pull your credit report to see how likely you are to pay your bill. A high score signals that you are less risky and more likely to pay your bill. A low score signals more risk. This is why lenders will typically charge a higher interest rate. When you purchase something as expensive as a new motorcycle, car, or home, a lower interest rate can make a big difference in the amount of money you pay over time.
How is a Credit Score Calculated?
Each credit bureau (Equifax, TransUnion) uses a different scoring algorithm to determine your credit score. This is why you might see a different score depending on which bureau you check. This is normal. While scores might differ, credit bureaus typically use five main factors when calculating a credit score. These include:
- Payment history. This includes information on how you have repaid credit in the past. For instance, did you pay your bill on time? Do you have a number of late or missed payments? Have your payments ever gone to collections?
- Used versus available credit. Lenders look at how much credit you have available to you versus how much credit you are using. If you have three credit cards and a line of credit and they are all maxed out, this signals to lenders that you may struggle to manage your payments. Creditors want to see that you can manage your debt and are making frequent payments.
- Length of credit history. Lenders look at the age of your oldest credit account. They want to know how long you have been using credit and how responsible you’ve been in managing your credit over time.
- Number of hard inquiries. How often are you applying for a new loan or credit card? If you apply for credit with a number of different lenders within a short period of time, this can lower your credit score.
- Credit diversity. Lenders like to see that you can manage several different types of credit. It can be good to have a mix of revolving credit (credit cards) and installment loans (mortgage, student loan, personal loan).
How to Check Your Credit Score
You can order a copy of your free credit report from the Canadian credit bureaus, Equifax and TransUnion. You may consider ordering reports from both bureaus because they each may have slightly different information on how you have used credit.
It’s a good practice to order your report at least once per year. When you order your report from the bureaus, it will not affect your credit score.
You have the option to order your Equifax credit report or TransUnion credit report by mail, telephone, or online. You will need to pay a fee if you order your report online and want to see the results right away. TransUnion allows you to order your report online once a month for free.
For more information on how to order your credit score, visit the Government of Canada website here.
How to Improve Your Credit Score
- Pay your bills on time. Missing as few as one payment can impact your credit score.
- Aim to pay your bills in full. If making a full payment is out of the question, make at least the minimum payment.
- Make frequent payments. This can help to ensure that your bills never get too high.
- Reach out. If you are struggling to make your payments, reach out to your creditor as soon as possible.
- Review monthly statements. Keep a close eye on your statements to ensure there are no mistakes or errors. If you find one, dispute it immediately.
- Don’t go over your credit limit. Know your credit limit and stay within it.
- Get a secured credit card. If you can’t qualify for a credit card, consider a secured card. A secured card functions like a regular credit card except you are required to pay a deposit upfront. The deposit reduces the risk to the creditor. If you fail to make your payment, your deposit is used as collateral.
- Check your credit score regularly. Monitoring your credit score is necessary to ensure you are trending in the right direction.
How Can a LIT Help Me if I Have a Bad Credit Score?
If you’re struggling to improve your bad or poor credit score, consider reaching out to a Licensed Insolvency Trustee. A LIT provides services like credit counselling to help you create a financial plan that is tailored to your lifestyle and budget. With the help of a LIT, you can begin to work towards building a good credit score.