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Your credit score is one of the most critical factors affecting your financial life. It impacts everything from your ability to get approved for loans and credit cards to the interest rates and terms you’ll be offered.

It’s essential to understand what constitutes a good or bad score, the exact factors that go into calculating your score, and how you can take steps to build and maintain strong credit over time.

This comprehensive guide will provide everything you need to know about credit scores in the Canadian market. Read on to learn how to check your score, interpret the results, and leverage this knowledge to unlock better financial opportunities.

Credit Score and Credit Report in Canada

What is a Credit Score?

A credit score is a three-digit number calculated by Canada’s two major credit bureaus, Equifax and TransUnion. It provides a snapshot of your spending patterns and bill repayment history.

Credit scores in Canada range from 300 to 900. According to Equifax, here is how lenders interpret the main score ranges:

• 300 to 559: Very poor. Getting approved for loans or credit in this range will be very difficult.
• 560 to 659: Poor. Approval will still be difficult, and you’ll pay much higher interest rates if approved.
• 660 to 720: Fair. Approval is possible, but you’ll pay above-average interest rates.
• 721 to 759: Good. You’ll likely get approved for most credit and receive rates close to average.
• 760 to 900: Excellent. Offer easy approval and you’ll qualify for the best rates from most lenders.

(Source: https://www.td.com/ca/en/personal-banking/advice/borrowing/what-is-a-good-credit-score)

As you can see, a score above 700 proves to lenders that you handle credit responsibly and on time. Aim to reach this range if possible, but scores between 660 and 700 are still considered decent. According to TransUnion, the average Canadian credit score is around 650.

The higher your credit score, the better financial terms you can expect to receive. So, building and maintaining excellent credit should be a top priority if you ever plan to borrow money.

What is a Credit Report?

Your credit report is a detailed record of your borrowing and repayment history, as reported by your lenders to the credit bureaus. It includes information about all your credit accounts, including:

• Loans such as mortgages, student loans, and car loans
• Credit cards
• Retail credit accounts
• Utilities you pay monthly
• Cell phone contracts

Your credit report will list the date opened, credit limit or loan amount, monthly payment, account balance, and payment history for each account. It also includes a record of all credit inquiries made by lenders.

Equifax and TransUnion use the information in your credit report to calculate your overall credit score. So, maintaining a healthy and accurate credit report is crucial for a good score.

How is a Canadian Credit Score Calculated?

While the exact formulas used by Equifax and TransUnion are proprietary secrets, we know the general factors that contribute to your score and their approximate weighting:

• Payment history (35%): On-time payment of all your credit accounts, from credit cards to phone bills. The presence of any late payments, bankruptcies or collections can severely damage your score.
• Credit utilization (30%): How much of your available credit you use. Maxing out cards and loans hurts your score. Ideal utilization is below 30%.
• Credit history length (15%): How long you’ve had credit accounts opened. Older accounts improve your score.
• Credit mix (10%): A healthy mix of credit types, including installment loans and mortgages. Heavy reliance on credit cards can hurt.
• New credit inquiries (10%): Opening many new accounts in a short period can signal risk and hurt your score.

(Source: https://www.consumer.equifax.ca/personal/education/credit-score/articles/-/learn/how-are-credit-scores-calculated)

Your score should remain strong as long as you pay all bills on time, keep your balances low, and build a long and varied credit history. Be cautious before applying for too much new credit.

How to Get your Credit Report and Score?

You can request free credit reports annually from both Equifax and TransUnion, but these reports will not include your scores. To check your scores, you have a few options:

• Purchase your score directly from Equifax or TransUnion for a small fee (usually under $20).
• Use a free credit monitoring service like Borrowell or Credit Karma to access your score for free.
• Check your score for free through your online banking platform if it provides the service. Many major banks now offer this.

It’s wise to check your scores from both credit bureaus several times a year. This allows you to catch any suspicious activity and verify your credit history is accurate. Dispute any errors right away by contacting the bureaus.

Why Do You Need a Good Credit Score?

A good credit score provides many tangible benefits that can save money and make your life easier.

With a strong credit score, you will qualify for the best loan terms from lenders, including low interest rates and flexible repayment options. This will save you thousands of dollars in interest costs over the lifetime of large loans like mortgages, auto loans, and personal loans.

Good credit also increases your mortgage affordability and purchasing power, allowing you to finance larger essential purchases like homes, cars, and home renovations at affordable rates.

Lenders are willing to extend higher credit limits and amounts to borrowers with excellent credit, providing greater financial flexibility. You will also have an easier time getting approved for new loans and credit products when needed.

Even cell phone companies, rental landlords, and insurance providers use credit checks and offer customers better terms and lower rates with demonstrated financial responsibility.

Lenders use your credit score to decide whether or not to approve you for loans and credit cards. They also base the interest rates and credit limits you’re offered on this number. Cell phone companies, landlords, and utility providers may check your score before approving applications.

Some utilities and rental services waive high-security deposits for customers with strong, established credit. Certain employers also prefer candidates with a solid credit history.

Furthermore, monitoring your score can also provide early warning signs if identity theft occurs.

Overall, a good credit score unlocks tangible rewards that provide convenience and savings in your daily life. Keep this in mind as you build your credit over time.

Why Your Credit Score Fluctuates?

It’s normal for your credit score to rise and fall a few points between check-ins. But if you notice a dramatic swing of more than 30 points up or down, here are some potential reasons why:

• High credit utilization: If your balances increase relative to your limits, your score can drop accordingly.
• Late payments: A single payment can decrease your strong payment history, taking points off your score.
• Hard inquiries: Too many new applications in a short span can indicate risk and hurt your score temporarily.
• New accounts: Opening new accounts lowers the average age of your credit history, which might impact your score.
• Credit limit decreases: Banks can lower your credit limits unexpectedly, negatively impacting your utilization ratio.
• Errors: Incorrect information being reported can significantly lower your score.

Major financial events like bankruptcy or student loan delinquency can also seriously damage your credit scores. Review your reports thoroughly and dispute any errors if a dramatic swing occurs.

Maintain Strong Credit Over the Long Term

Once you’ve built your credit score into the good or excellent range, maintaining it requires just a bit of ongoing attention:

• Keep credit utilization low: Using more than 30% of your available credit hurts your score, so keep balances well below this threshold.
• Pay all bills on time each month: Set up autopayments so you never miss a payment. Payment history is critical.
• Be selective when opening new accounts: Only open new credit when needed to avoid unnecessary hard inquiries.
• Check for errors regularly: Verify all accounts and payment statuses are reporting accurately. Dispute errors.
• Consider strategic account closures: Closing newer accounts may increase the average age of your credit history.
• Note that long history is most important: Avoid closing your oldest accounts if possible, as longevity helps your score.

With diligence, your credit score can be preserved and even improved through smart financial habits.

How to improve your Credit Score?

If you want to raise a poor or fair credit score, here are proven techniques:

• Pay your bills on time. Set up automatic payments so you can pay due dates on bills that get reported to the credit bureaus. Even one late payment can hurt your score.
• Restrict your credit use, do not use more than 35% of your available credit. For example, if you have a credit card with an available limit of $10,000 and a line of credit a limit of $12,000, try not to borrow more than $10,000 + $12,000 x 35% = $14,200.
• Avoid closing old accounts. Keep your longest-standing credit accounts open, even if you don’t use them. The age of accounts helps your score.
• Limit your credit inquiries. Applying for too much new credit at once can hurt through additional hard inquiries on your report. Wait at least six months between applications.
• Correct reporting errors. If you have errors on your credit report, ensure they are fully corrected by disputing them. Inaccuracies drag down your score.
• Use a mix of credit. Having installment loans, such as mortgages and credit cards, demonstrates that you can handle diverse credit types.

With diligence and smart financial habits, you can rebuild struggling credit to open doors for your future.

What if I have a Bad Credit Score?

Having bad credit can seriously limit your financial opportunities and options in life. A poor credit score leads to higher interest rates, lower credit limits, and much lower approval odds for mortgages, car loans, credit cards, and other financing. You may also have to pay large security deposits for rentals, utilities, and phones.

Overall, bad credit closes doors, leads to higher costs and fees, and prevents you from accessing the best financial products and terms. The impacts range from frustration to severely limited finances.

If you currently have bad credit, don’t lose hope. You can still take steps such as getting a secured credit card, becoming an authorized user on someone else’s account, negotiating lower interest rates with creditors, using credit counseling services, waiting for negative items to fall off your reports, or considering alternative or private lender options.

Why Checking Your Spouse’s Credit Matters?

If you plan to apply for joint loans or credit cards with your spouse, it’s wise to check both of your credit scores in advance. Here’s why:

• Their score impacts approval odds: Lenders will consider the lower credit scores of the two of you to make decisions. A poor score by one applicant can jeopardize joint applications.
• You’re connected financially: Late payments made by your spouse can still impact your personal credit score over time, even on accounts you’re not associated with.
• Life events affect you both: Major events like bankruptcy will damage both parties’ credit scores, even if they were filed individually. Divorce can also wreak havoc on credit through account closures.
• Co-signing is risky: Becoming a guarantor on your spouse’s loans means their missed payments can devastate your credit. Only co-signing if you have full confidence.

Check both your and your partner’s credit reports for accuracy regularly. Work together to build and maintain strong scores, communicate about financial decisions, and divide credit management tasks.

Other Factors Affecting Your Credit Scores

Divorce

Divorce can negatively impact credit scores when joint accounts are improperly divided or maintained. If joint credit accounts like mortgages or credit cards remain open, missed payments by an ex-spouse still damage your credit history and score, even if you are no longer together. Your credit reports reflect any late payments on accounts tied to your name.

To avoid credit damage, joint accounts should be closed or converted to individual accounts where possible during a divorce. Careful management of credit and liabilities during divorce proceedings is crucial to prevent lasting harm to your credit reports and scores. Seek legal counsel to ensure accounts and debts are properly divided.

Student Loans

Student loans can help you get an education, but they also impact your credit in the short and long term. The loan applications themselves cause hard inquiries that temporarily lower scores. The additional accounts also decrease the average age of your credit history.

However, responsibly making on-time payments builds a positive credit history over time. Defaults and delinquencies on student loans devastate credit scores for years. It’s wise to minimize student debt, make timely payments, and utilize deferment and forgiveness programs as needed.

Overall, student loans are an investment in your future that allows you to build your credit portfolio. Just be cautious of taking on excessive debt and focus on making regular, timely payments.

Debt-to-income Ratio

Your debt-to-income ratio (DTI) measures how much your gross monthly income is used to pay debts. Your DTI ratio doesn’t directly impact your credit score. However, the higher your DTI, the higher the risk you pose to lenders. If over half your income goes to debt payments, you may have trouble covering a new loan. Therefore, it is the factor lenders may consider when deciding to approve you for an additional credit account.

The Impact of Closing Credit Accounts

Consider closing some open credit accounts you no longer use when raising your credit score. But this can have some adverse effects:

• Lowers total available credit: This increases your credit utilization ratio.
• Removes credit history: Closing your oldest accounts shortens your credit history length.
• Credit score drop: Accounts closed in good standing still cause an initial score drop.
• Reconsider if cards have fees: Cards with annual fees can be closed to avoid fees.
• Leave old accounts open: Having long-standing accounts, even if unused, helps your score.

If you choose to close a credit card or other account, do so only if it doesn’t cause major damage to your score through increased utilization or lowered history length.

Key Takeaways to Remember

• Check your credit score frequently and monitor report accuracy.
• Pay all bills on time and keep credit utilization low.
• Have a mix of credit types and limit new applications.
• The length of history is valuable, so keep accounts open.
• Major events or errors can cause credit score drops.
• Divorce, student loans and DTI directly and indirectly impact your credit.
• Rebuilding credit takes diligence and patience over time.

Understanding and properly using credit is key to financial health and success. Use this guide’s knowledge to control your credit score and unlock better opportunities.

By monitoring your credit reports, maximizing positive scoring factors, and minimizing risks, you can build and maintain excellent credit over the long term.

A strong credit score unlocks better interest rates and approval odds for mortgages, loans, credit cards, and more. It also provides security and preparedness for major life events.

Empower yourself and unlock brighter financial opportunities by taking action today:

• Check your credit score and report for accuracy. Dispute any errors holding back your score.
• Make a plan to improve your credit through careful account management, payment diligence, and debt reduction.
• Consult credit experts for guidance tailored to your unique situation and goals.

At Best Mortgage Online, our experts are ready to help you build stronger credit, achieve homeownership, and confidently meet any financial challenge.

Don’t let credit hold you back. Take control and unlock your financial potential with Best Mortgage Online now!

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