Your credit score is a large portion of what banks and lenders look at when deciding whether or not to lend to you.
A credit score is a simple number that helps tell a lender whether you are a high risk or low risk borrower.
While many people check their credit only before they are about to apply for a mortgage or loan, it’s important to check your credit on a regular basis to ensure accuracy and to also ensure your
score is as best as it can be.
Increasing or improving your credit score is not an overnight thing, it can take months, so it’s better to get ahead of the curve.
You can find out your credit score using a number of online services in real-time. Financial advisors can also find out on your behalf, as can your bank.
But what they don’t always tell you is what your credit should be.
Once you know what your number is, how do you know whether it’s good enough or not? What do credit scores even look like?
Credit Scores in Canada
The good news though is that most lenders will use the same credit system: that being your FICO score (Fair Isaac Corp).
The higher the number, the better your credit score.
So right away this might give you a good indication as to what a good score might look like.
In Canada, credit scores can range from 300 to 900 points – which is the best score you can get.
It is thought that 650 is considered an important number and one that will ensure you are eligible for many different types of credit.
Anything under that will make life more difficult for you.
What’s interesting, is that the number lenders find on your credit bureau file may be slightly different from the one you see when you pull your file yourself.
That’s because each creditor usually applies their own unique “risk rules.”
This will add or remove points for a number of different scenarios relating to the specifics of the credit you want to be given.
The score you see is a kind of aggregated score that has been created using an algorithm aimed at consumers. At a high level, this is what it looks like:
- 780+: Excellent
- 720 to 780: Very Good
- 650 to 719: Good
- 600 to 649: Average
- 300 to 599: Poor
Based on TransUnion data, this is how the Canadian population roughly breaks out in terms of credit scores.
For example, if you had a credit score of 800, that means you have a higher credit score than 61 – 80% of Canadians who have a TransUnion file.
Why Your Score Matters
So now you know your credit score… why does it matter?
Well basically, the better your score is, the more likely it is that banks and loan companies will want to lend to you.
To be approved for a credit card you will likely want at least an average credit score and many companies will only be willing to give cards to individuals with scores of 630 and up.
For higher loans however, you will need an even better score.
And even once you have a high enough score to get that car loan or mortgage, it’s still worth improving it further as this will result in you qualifying for better interest rates.
The good news though is that your credit score isn’t the only thing that dictates whether you can get a loan.
Often banks will provide mortgages as long as your credit score is average if you can demonstrate you are stable in other ways – having large amounts of savings, holding down a steady, high paying job and making all your payments on time can all help you be more appealing for loans.
Likewise, using a guarantor or getting a secured loan, will help you get loans even if your credit score isn’t ideal.
Understanding and Fixing Your Score
If your credit score is high, you really have nothing to fret, you’ve probably been doing all of the right things. However, if it is low, here are the most common reasons:
- You have made late payments on current credit accounts
- You have missed payments on current credit accounts
- Your credit utilization is high, i.e. you are close to the max limit of the credit you have, aim to stay at about 30%
- There are errors on your credit report that have not been correct
Be mindful of making all payments ON TIME and bringing your utilization down to 30%. This can be done either by paying down debt OR by opening new credit lines/extending the limits you currently have.