Canadian Credit Score (Part 1)

Whether you are a local resident, an international student, or a new immigrant, having a good credit score is important. In the eyes of Canadian financial institutions, your score reflects your credit behavior, and they will decide whether to lend you money based on your score. For example, missing or late payments may lower your score, making a habit of paying your bills on time may improve your score, and more. In this episode we are going to explain what a Canadian credit score is.

Let me remind you, never underestimate the difference in credit scores. When you need to borrow a large amount of money to buy a car or a house, getting a low interest rate can help you easily save thousands or even tens of thousands in interest in a few years. In the next episode, we will introduce how to obtain a credit score and quick methods to improve it. Friends who want to know more should not miss it!

1. What is a credit score?

A credit score is a three-digit number that banks, credit card companies and other financial institutions typically use to evaluate your creditworthiness or your likelihood of repaying your debt. This includes personal loans, lines of credit, mortgages, car loans and credit cards. Canada’s two main credit bureaus, Equifax and TransUnion, use this information to help make decisions about the services and products they offer you, such as interest rates and insurance premiums.

2. How is a credit score calculated?

The composition of the credit score is mainly calculated based on the following five factors:

A. Repayment record 35%
The repayment history includes the repayment status of all credit card accounts, installment accounts such as car loans, home loans, or student loans, company credit accounts, and some public records, etc., including whether the loan is repaid on time, whether there are any late payments or non-payments. . This item accounts for the largest proportion in the credit score calculation, accounting for 35% of the total.

B. Credit utilization 30%
If you want a better credit score, it is recommended to keep your credit ratio below 30%. For example, suppose you have two credit cards, each with a credit limit of 5,000. This means that the credit limit under your name is 10,000. It is best to keep it below 3,000. (30% of 10,000).

C. Credit history 15%
The length of your credit history is related to the age of any of your credit accounts, including any credit cards, lines of credit, and mortgages. The longer your credit history, the greater the positive impact on your credit score. It would therefore be advisable to keep your oldest financial accounts open so that even if you no longer use them regularly, you can still preserve the credit history established with your oldest lines of credit.

D. Credit mix 10%
Credit mix refers to the various types of credit accounts that make up your credit report. Having different types of credit accounts on your credit report shows lenders that you can manage your finances responsibly. There are four main types of credit that may appear on your report: revolving credit (such as credit cards and lines of credit), installment payments (such as loans), mortgages, and open-end credit (such as cell phone plans and utility bills). 

E. Credit inquiries 10%
This happens when a lender, creditor, or other individual asks to see your credit report, or when you apply for a credit product or rent a home. This kind of report is called a hard inquiry (commonly known as a hard pull). If you inquire several times in a short period of time, it means that the lender is worried that you are in financial trouble and desperately seeking credit, which will cause your credit score to be lowered, so do not make any inquiries in a short period of time. There are too many inquiries in a time period, but if the user inquires about his or her credit report, it will not affect the credit score.

3. Credit scoring criteria

Credit scores usually range from 300 to 900, depending on your financial behavior. The higher your score, the easier it is for you to obtain these financial products and services (for example: house payment, car loan, etc.) A good credit score is generally between 713 and 900.

According to 2022 data, the average Canadian credit score is 672.

760 to 900: Excellent credit score and can often get the best offers and rates.

725 to 759: Very good credit score and are considered a very reliable borrower by lenders.

660 to 724: Close above average, and most lenders consider this person to have good credit.

560 to 659: Under average and you might get a loan but usually with a higher interest rate.

300 to 559: Well below average, and you are considered a high-risk borrower and typically cannot apply for credit cards or loans.

While the typical range for a credit score is 300-900, if you don’t have any credit history in Canada or don’t have any credit products yet, or you just arrived in Canada recently, your credit score may be zero, but don’t worry, credit score It will be updated approximately every 3 months. You can search for free credit assessments and reports online and get improvements and suggestions!