What is a good credit score in Canada? If you’re not sure, you’re not alone. Whether you’ve just found your first (dream) job and you’re wondering how to build a credit score, or you’re on a mission to break bad money management habits and improve your credit, it’s important to understand how your credit score can work for you or against you.
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How credit scores work in Canada
First, let’s break down what your credit score is: essentially, it is the measure that financial institutions use to determine how likely you are to pay back your loans on time. According to the Financial Consumer Agency of Canada (FCAC), put simply, your credit score will increase when you’re managing your credit responsibly, and it will decrease if you’re having trouble meeting these commitments.
The good news is that it’s never too late to start improving your credit. By embracing a few habits detailed below, you could be on your way to having a score that can help you achieve important financial and life goals – whether they be buying a car, snagging that perfect rental or making another important purchase.
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What’s affecting my credit score?
To understand how your credit score improves or worsens, you first need to understand how credit scores are calculated. While different Credit Reporting Agencies in Canada may have different scoring models, we have elaborated on some of the factors identified by the FCAC that you’ll want to keep in mind:
- Payment history and habits. In short, do you pay your bills on time, or are you often late?
- How you use your credit. How much of your available credit have you used? Do you keep your balances low?
- The length of your credit history. Are you just starting out, or have you had a credit history for years?
- The types of credit you have. There are two main types of credit: instalment credit and revolving credit. While the former includes car loans and student loans where you make a fixed monthly payment, the latter, like some credit card loans, gives you the option to pay off the balance in full.
- New credit. How many new requests or recent credit inquiries exist on your individual file?
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What is a good credit score in Canada?
Credit scores typically range from 300 (on the low range) to 900. While individual credit bureaus such as TransUnion and Equifax may differ on the exact numbers, most would peg a good credit score in the 670 to 739 range. Anything above that is all the better.
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Learn how to build credit in Canada
Use your credit card responsibly while making your payments on time. If you don’t have a credit card and want to increase your credit score, your financial institution can help you establish or repair your credit. Just be sure to only apply for the credit you need – try not to apply for too many cards.
What can negatively impact credit scores?
Knowing what to avoid from the start is just as important as knowing what to do to help establish good credit. Whenever possible, try to avoid doing the following:
- Being someone’s co-signer, regardless of how much you trust them
- Not paying your bills on time or missing payments altogether
- Constantly keeping a high balance, close to your limit
- Paying off your balance too quickly
- Submitting multiple credit applications in a short amount of time
- Not being proactive when you notice you’re having trouble keeping up
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Keep your balance low
Remember how we said that credit bureaus look at how much of your available credit is already used up? Maintaining low balances not only helps keep your interest payments in check, but it also keeps your credit utilization ratio low (this is the balance of your credit accounts compared to your credit limit).
Similarly, this is a common reason why Canadians with good credit scores may accept credit card limit increases. Accepting an increase doesn’t mean you need to use up the limit, but keeping your same low balance will further reduce your credit utilization ratio when that limit is even higher.
Regularly keep tabs on your credit score
Whether you turn to your credit bureau of choice (such as TransUnion or Equifax) or an online credit score tool to help, it’s a good idea to regularly check your credit score to determine how your credit is faring. Once you have your score, you may want to log it somewhere so you can have an idea of what your credit history might look like year-after-year to potential lenders over time. And don’t worry – checking your credit annually won’t damage your score, so long as you’re not applying for multiple credit cards and other loans in short order.
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Having different types of credit
To help increase your credit score in Canada, you’ll want to demonstrate that you can handle a variety of different types of credit – from your go-to credit card to those monthly car loan payments. Creditors consider how you are with different types of credit – revolving and instalment credit.
Stay organized with your finances
One of the best ways to build credit in Canada is to keep your finances organized. While we all have lapses, try to keep a good handle on your finances and budget by keeping track of your saving and spending habits. Set up a budget tracker or use a pen-and-paper system (whatever works best for you) to log your day-to-day, week-to-week and month-to-month spending, so you are aware of exactly how much money is going in and out. This can be an easy one to overlook, but it can make a big difference in your financial situation.
Maintain a steady credit history over time
Understandably, being able to show you are dependable when it comes to making your payments is an important indicator of mindful and responsible spending, making you low-risk (read: desirable) to lenders. For this reason, you’ll want to make sure you’re keeping up with consistent payments when possible to prove you’re reliable for repaying loans over time — even if you experience a momentary blip.
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