Credit Score Canada residents need to know & How to increase it

What is a Credit Score in Canada?

What is a credit score? Canada’s credit score is a 3-digit number that is assigned to individuals. Financial institutions, private companies, landlords, and anywhere that cares about your financial performance will check it and, based on that, decide whether to trust you and, if they do, what conditions to offer you.

For example, before granting a loan, a bank checks a person’s credit score, credit risk (the risk of how likely the borrower is to default on or default on their loan or credit card debt), and their ability to pay off their credit card debt and obligations. It usually means that in Canada, you cannot get a loan or any type of credit without a good credit score.

The national organizations Equifax and TransUnion create a credit score and a credit report for each person based on the information they receive from banks. 

Why is a credit score important, and how to improve it?

If you want a mortgage, car loan, credit card, etc., in Canada, banks and financial institutions will pay attention to your credit score and determine whether you qualify. Even if you don’t have a credit score, some mobile phone operators refuse to sell you a SIM card. 

As a result, you will quickly learn the importance of credit scores in Canada. If you need to know what credit score is, we will fully introduce you to this concept and how to calculate it in this article. 

A minimum and maximum credit score in Canada

A credit score in Canada is a number between 300 and 900. The lower your score, the less likely you will get a credit card or loan, or the more complex the conditions. If your credit score is low but you qualify for a credit card or loan, you will likely be offered a high-interest rate. 

The higher your Canadian credit score, the more likely you will be approved for a credit card or loan, and the more likely you will be offered a lower interest rate.

Having good credit can help you rent an apartment, get a better job, get your application approved for lower-cost insurance coverage, and get better TV, phone, or utility plans.

Excellent (800 – 900)

People with excellent credit scores are those who have never (or rarely) defaulted on their debts. These people usually pay their debts in full and regularly and have a low credit utilization ratio in all lines of credit.

The request of these people to receive a credit card and loan will be approved immediately. Also, banks and other financial institutions offer the lowest interest rates to these people. At the same time, the credit card credit limit and the loan amount offered to these people are high.

People with high credit scores are also given special credit cards. In other words, all economic doors are open to highly rated Canadians. The average credit score in Canada is 749, which means that half of the Canadian population has an excellent or very good credit score. 

Very good (740 – 799)

This score shows that the borrower is financially responsible. People with such a score are rarely late in paying their debts, and their credit utilization rate is probably low.

Usually, a lower interest rate is offered to these people, and they are probably qualified to receive most cashback cards and high-level rewards cards (if you have such a card, a percentage of the purchase amount will be refunded to your account if you make a purchase with it). Of course, some unique cards that require a high score may not be awarded to these people. 

Medium (670 – 739)

People who have an average score have probably been late several times in paying their debts to more than one bank, and maybe they have not been able to pay their debts to the bank on the due date according to the contract. Probably, a high-interest rate will be offered to these people.

However, with an average score, you will at least qualify for some valuable unsecured credit cards. 

Below average (580 – 669)

Loan applicants who have such a credit score in Canada will be offered a higher interest rate, which will cost them a lot over time. These people are also not eligible for certain credit cards (cards that refund a percentage of the purchase amount back to your account). 

Weak (300 – 579)

Perhaps the loan applicants who have obtained such a score have been unable to pay their loan debt on time several times. The total debt of these people is almost close to their credit limit (in other words, the ratio of spending to their credit limit is high). Of course, these people may be bankrupt.

Remember that bankruptcy information stays on your credit report for at least seven years. If your credit score is in this range, you will have a hard time getting a standard credit card or loan.

Although you can pay off your secured credit card debt (a secured credit card is a type of credit card backed by money in one of your accounts, and the bank does not allow you to use it, this type of credit card to start A newcomer is a great fit (until they build up a track record and can earn real credit with the right salary and financial behaviors) and increase your credit score. They can also improve their Canadian credit score by paying for low-score loans.

What is a credit report? 

A credit score in Canada is a brief index to determine your creditworthiness. But the credit report contains comprehensive information about your financial records. Lenders also look at your credit report to determine whether to lend to you.

This report includes important information such as an address, insurance number, payment history to credit institutions, bankruptcy or financial convictions that affect your creditworthiness, and a list of lenders or other organizations that are allowed to check your credit. and any banking information. 

Canadians are entitled to a free credit report from Equifax or TransUnion each year (called a Consumer Disclosure). 

What is a credit rating?

Some organizations (credit reporting agencies) give a rating to each of the items in people’s financial history. In this rating, the type of credit used and the speed of debt payment are known. The rank of each item in your financial history is expressed with a number from 1 to 9.

A score of 1 means you have paid your debt within 30 days of the due date, and a score of 9 means you have never paid your bill or provided the lender with a repayment plan. 

Next to each number, a letter indicates the type of credit used. For example, the letter I is used for installments (such as a car loan), the letter O (student loan) for a loan, and the letter R (such as a credit card) for revolving credit.

How to calculate Credit Score Canada

Many factors can have a positive or negative effect on your credit score. Equifax and TransUnion both use different formulas to determine Canada’s credit score. However, some of them are common.

In general, the way to calculate a credit score depends on many factors and is complicated. In the following, we examine some important factors. Note that the numbers are approximate and experimental; these companies have very complex algorithms and are constantly improving them. You can also get a free general report from the Credit Karma company, which is usually clear and gives a good general idea. 

Factors affecting credit score calculation

Debt repayment history (35%)

The most important factor influencing the credit score is the history of debt repayment. Banks want to know how you will repay the loan amount. Your payment history will show your ability to repay the debts. 

Your payment records will show information such as paying off all debts (except the mortgage). 

Have you paid your debt according to the contract? Is your payment delayed? Is the debt paid in full? Are payments late? Has the bank sold your account to a collection agency to collect debts? Such information is included in your payment records. Bankruptcy records and claims on your home deed (liens) are also included in this category. 

Although the amount of your credit score reduction for each of the above violations is confidential, the general rule is that the higher your credit score initially, the more points will be deducted if you commit these violations. In other words, if your credit score is low, your score will drop less if you engage in bad behavior.

For example, if your credit score is 780 and you’re 30 days late on a payment, your credit score could drop by as much as 90 to 110 points (and if you’re late by more than that, you’ll lose even more points). . But if your credit score is 680, and this is your third late payment, only 60 to 80 points will be deducted from your score.

If your score is 780 and the bank executes your house mortgage, between 140 and 160 points will be deducted from you. If your score is 680, only 85 to 105 points will be deducted from it. 

More recent payment records have a greater impact on credit scores in Canada. In other words, older payment history has less impact on your credit score. 

Credit usage ratio (30%)

Credit utilization is the ratio of your use of credit to its limit. For example, if your credit card limit is $1,000, and you use $200 of it, your credit utilization ratio will be 20%.

As a general rule, keeping your credit utilization ratio below 30% is better. 

Financial records range (15%)

For those who intend to buy property in Vancouver, lending institutions want you to have a long credit history and use your credit consistently. Those who have a short credit history or who have not used their credit regularly will have a higher risk of not paying their debts in the eyes of financial institutions. 

Soft and hard credit checks (10%)

In the soft check, you check your credit score, or someone else checks it for non-lending purposes. This review does not negatively affect your credit score. 

In a soft check, on the other hand, you check your credit score for purposes such as getting a credit card or loan. Multiple hard checks in a short period of time will have negative effects on your credit score (at least 7-10 points off it). Because this indicates that you are not in a favorable financial situation and makes financial institutions think that you will go to other banks to get a credit card.

credit diversity (10%)

Credit diversity tells banks what types of credit you’ve used (what loans you’ve taken). The more variety of credits, the better. Because it indicates that all kinds of credit, such as loans, credit cards, and credit lines, have been used responsibly, paying installments on time, and having a good balance of credit shows the lending institution that you are responsible for all of your debts. As a result, it increases the probability of granting a loan. 

Important points in increasing credit score

Negative information will remain in your credit history for at least 7 years. If there is a negative item on your credit history, you must take appropriate steps to improve your credit score in Canada. Right now is the best time to make up for lost points. Stay with us to learn how to increase your credit score

Pay your bills regularly and on time. Pay your 

monthly bills on time. Late payments lower your credit score. So, arrange for your debts to be paid automatically so that you don’t have any late payments.

If you use online banking services, be sure to pay your debt a few days before the due date to ensure that your payment will be processed on time. 

Reduce your credit utilization ratio. 

Be sure to pay off your credit card debt and other debts to reduce your credit utilization ratio. For example, start with a credit utilization ratio of 75%. The lower this ratio, the better. The best condition is to bring the ratio of credit consumption to 30% or less.

After a month of reducing your credit utilization ratio (to 30% or less), your credit score will increase (reportedly between 40 and 80 points). Of course, provided that you do not have any misconduct such as late payment. 

No credit checks unless necessary

Check your credit score only when necessary. A soft credit check (for example, if a landlord or employer checks your credit score) will not lower your credit score. But hard credit checks (such as when you want to increase your credit limit or take out a loan) can have a negative impact on your credit score. 

Some Canadians get some cash and special points by doing things like credit churn. In other words, the applicant applies for a credit card to use the benefits of the first months of registration. But in the future, when he no longer receives benefits, he cancels his credit card. While this has its advantages, it won’t positively impact your credit score. Approximately 10 points will be deducted from you whenever you get a new credit card

Do not immediately close the settled credit card.

After paying the full amount of the debt, do not immediately close your credit card, even if you no longer need it. Because keeping a credit card open will keep your credit utilization ratio low. In addition, for your credit evaluation institutions, this question and concern arise that maybe the person made a mistake and the bank closed the person’s account.

To understand this better, let’s consider an example. Suppose you have two credit cards with a credit limit of $1000 each. You owe $500 on one of these credit cards, and you’ve completely paid off the other card. In this case, you’ve used $500 of your total $2,000 in credit. As a result, your credit consumption ratio will be equal to 25%.

But if you close a credit card with no debt, you’ll have a total of $1,000 in credit with $500 spent. As a result, your credit usage ratio will reach 50%, which is twice the first case. In other words, your credit utilization ratio was low and reasonable before you closed the settled credit card. But after it was closed, this ratio increased. 

Increasing credit by exiting the Consumer Proposal process

If your credit problems are high, entering the Consumer Proposal process will help you get out of debt by paying a percentage of your total debt. This process is costly and will severely reduce your credit score. You can use this method to pay off your debts for a maximum of 5 years.

But you can get a consumer proposal loan, quickly pay off your debt, and increase your credit score. This loan will pay off your debt to the banks and allow you to get out of the consumer proposal process. You can increase your credit score by regularly paying the installments of this loan. 

A credit score of foreigners in Canada

If you’ve recently moved to Canada, you probably understand the importance of a high credit score if you’ve been looking to lease a car, buy a house, buy a cell phone, or get a credit card. 

If you are one of those who immigrated to Canada this year, welcome. Aside from adjusting to a new country, home, and job, you’ll quickly realize the benefits of building a high credit score.

Whether you’re looking to lease a car, buy a home, get a cell phone, or get a credit card, you need to build your credit history quickly so you can be offered loans with the best interest rates.

Note that credit is a double-edged sword that can cut you if you need to be more careful. In addition, evaluation institutions are cautious and give more pessimistic opinions than optimistic ones wherever there is uncertainty. In the following, we present some points related to creating a credit history by foreigners.

  • Get an unsecured credit card. Get an unsecured credit card as soon as you arrive in Canada. Many major banks offer new immigrants a low-cost credit card through special banking packages (such as Royal Bank’s Welcome to Canada package and Bank of Scotland’s Start Right program). Be sure to use the credit card properly after receiving it. 
  • If needed, get a secured credit card. As mentioned above, people who do not have a credit history may only be eligible to receive a credit card with a guarantee. These people can get a guaranteed credit card. These cards require a refundable security deposit (usually equal to the card’s credit limit). In other words, you have to give an amount as a guarantee to the bank to issue you such a card with the same credit amount. The advantage of using a secured credit card is that your payments will be reported to credit agencies, and as a result, you will gradually build up the required credit history. 
  • Provision of a mobile phone line. Some operators have announced that they don’t need to check credit history to get a mobile phone line. These carriers report your bill payment history to credit bureaus. Note: If you buy a credit (pre-paid) SIM card, it will not help to increase your credit score in Canada. Therefore, if you want to create a credit history, be sure to get a permanent (post-paid) SIM card. 
  • Paying the credit card bill on time. Be sure to pay your credit card bill on time. 35% of credit score depends on your credit history. If you are even an hour late, it will have a negative impact on your credit history. Paying on time does not mean paying the entire debt, but it means paying the minimum amount stated on your credit card statement on the due date. Be aware of how many days you have to pay after receiving the credit card statement (this period is called your grace period). Usually, this period is about 21 days. To avoid payment delays, you can enable automatic payment from the bank account. 
  • Paying the total amount of the debt monthly. Paying the bill on time while still in debt will have a greater impact on increasing your credit score than paying off the debt completely. However, we do not recommend this procedure. Using a credit card and paying off your debt monthly will help you have peace of mind and increase your Canadian credit score. But compared to paying the necessary amount, your score will increase less. One of the big disadvantages of using this method to increase your credit score in Canada is that you have to pay a lot of interest on your debts. 
  • Use of different credits. Credit agencies love people who use multiple sources of credit. So, if you can get a credit card, cell phone, or car loan (usually with a large deposit), you’ll build a high credit score faster. 
  • Try to avoid having multiple cards with low amounts, but have cards with high credit from two institutions (not one). You will have better debt and budget management, and you will get more points.
  • Don’t be tempted and listen carefully when they suggest that you can get a credit card, but don’t get a new card because later, closing these cards will become a problem, and you will lose points. In addition, gradually, as your score increases, you will get better offers, so wait until you make a better hunt. Remember that when they offer you a card, they are actually telling you to apply for them to check. Checking them can lead to a decrease in your score or disapproval.
  • Get your two credit cards from two different companies, Visa and Mastercard. It is said to be effective. Even if it doesn’t have a positive effect, you have more freedom in your daily life because some stores, like Costco, only have a contract with one of these two companies.
  • Usually, the best way to get a new card is when your score has changed dramatically and you have been preapproved to get good scores with less trouble.
  • Try to avoid doing things that damage your score in the near times when you know your score will be checked, such as getting a loan and buying a house, such as buying car installments, cell phones, or home appliances. Although it lowers your score for a short period, it raises questions and worries for the lender (of course, you’re the one paying for those worries).
  • The matching of your address in all bank accounts and its stability are among the things that are important and indicate the stability and, therefore, low risk of the customer.

What have you done to improve your credit score? Please share your valuable experiences with other readers and us.

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