If you’re like many Canadians who want to learn about credit score or are looking to gain more knowledge about it; here are a few things to know about it and the importance of having a good score.
What is a Credit Score?
Your credit score is a three-digit number, typically between 300 and 850, designed to represent your credit risk. It is meant to predict the likelihood you will pay your bills on time. Your score is determined by the Canadian credit bureau. Depending on the score that the person has, this allows the creditors to determine the likelihood of the individual or borrower to make their bills or payments as agreed.
So why is it so important? For example, Mark wants take a loan with his local bank in order to purchase his very first home. The local bank has the ability to gain access to Mark’s credit history. Depending on his credit score and credit history, the bank is given an idea of their likelihood of receiving the borrowed money back with added interest. This allows the bank to have an idea of the interest rates to offer Mark. If he has an excellent credit history with no default in payments, Mark could benefit from very low interest rates. But, if his credit history is only average, he will most likely receive very high interest rates. What’s worse, his request for a loan might even be refused.
Lenders will utilize the services of companies like TransUnion or Equifax, (all credit reporting agencies trusted by Canadians), to do an overall credit check on any person or company. It is very important to have a good credit score especially if you are making a big purchase and want to take up a mortgage.
Key Factors that Calculate your Credit Score
Let’s get to the factors that determine your credit score. These are the following according to Equifax:
- Your payment history;
- Your used credit vs. your available credit;
- The length of your credit history;
- Public records, and
- Number of inquiries into your credit file.
Credit Ratings & What they Mean to Creditors
For a bit of perspective, the lowest credit score in Canada is 300 and the highest is 850. Here is a range of credit ratings that can help you understand the different rates and its meanings.
- Lower than 500: This is a bad credit score to be walking around with. This means that you will not be approved for new credit and should probably seek immediate professional financial assistance. If you want to improve your score, this may be one of your only options.
- 500-579: This score will need work but your rating can be improved by yourself or with the help of a financial expert. Unfortunately, you will most likely not be approved for new credit.
- 580-619: With a 600 credit score, you are still considered a high-risk lender and it will be very difficult to acquire loans and if you are approved, you may be subject to certain conditions and pay higher interest rates. So, if you could avoid this range, it would be beneficial to you!
- 620-679: A score in the mid-600s is considered average credit rating but can use some improvement. You are within the national average but you will still likely receive loans at higher interest rates.
- 680–719: You credit is good and you will benefit from better rates with lenders. So, this is a good place to aim if you’re currently struggling.
- 720-779: You have a very good credit rating and you will most likely benefit from the best rates the market has to offer.
- 780+: Congratulations! You will benefit from the lowest interest rates and you are more likely to be approved for most loans.
TransUnion’s recent data determined that the credit score national average is about 650. In the city of Toronto, the average Canadian has a score of 679, Montreal at 663, Calgary at 650 and Vancouver at 687. Therefore, if you’re below any of these, you should try to up your credit score.
Who Looks at Credit Scores & Credit Histories?
It’s not just the banks that look into your credit history or score. Any person or company can make inquiries with credit reporting agencies. These companies could be cellphone or internet providers, landlords or even potential employers. They are all able to make any inquiries on any individual who seeks their services. It is becoming a very common practice that landlords, service providers or even employers look into credit history.
There has been a spike in fraud in the recent years and more companies have taken the practice of making a credit checks on individuals. Credit scores are important and these information are made available upon request and the individual or corporation can determine your likelihood to default in payment by analyzing your credit rating. They administer a quick credit check to approve or deny your request and it is all at their discretion.