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Credit scores can be quite difficult to understand, especially if you don’t know what they even mean. The great news is that you don’t have to worry anymore.

There is a lot that goes into determining them. So, even if you have good scores, this guide will show you how to boost them even more.

Credit is an important part of your finances. Good credit scores will make your life easier when obtaining loans and getting a job in certain industries. 

Once you understand credit scores and the ways to maintain it, you’ll be able to weigh each decision. 

What is a credit report?  

Canada has two credit bureaus for credit reporting, Equifax and TransUnion.

Both are independent companies that collect data, such as bills and debt obligations. The credit bureaus of Canada gather information from citizens. 

They know every financial move you make from when you pay your bills, how often, and when you miss a payment. 

You permit these bureaus to share your information with financial institutions and credit providers, who then form a credit report.

What is a credit rating? 

A credit rating is an evaluation on each account, such as your credit card. The rating describes the type of credit used and how quickly you repaid them.

Ratings range from 1 to 9.

You will receive a rating of 1 for payments made on time. 9, on the other hand, means you still haven’t paid the bill or the account is bankrupt.

Besides the numbers, there are three letters assigned to every credit rating. The letter represents the type of credit used. For instance,

  • ‘I’ stands for installment, and the loan is being paid over a certain period, such as a auto loan
  • ‘O’ for open, which means you have open credit, such as a line of credit
  • ‘R’ for revolving, means you have access to a set amount of money, such as credit cards

Here’s a quick example of the letter and numerical value working together:

  • R0 – credit not used or little history
  • R1 – paid within 30 days of due date 
  • R2 – paid after 30 days but before 60 days of due date
  • R3 – paid after 60 days but before 90 days of due date
  • R4 – paid after 90 days but before 120 days of due date
  • R5 – paid after 120 days or more of due date
  • R6 – N/A
  • R7- a settlement for agreed upon payments
  • R8 – repossession
  • R9 – account is in collections or bankruptcy

What is a credit score?  

To begin, a credit score is a 3-digit number that falls in the range of 300 to 900 points. The higher the number, the better the score. 

Using the credit report, it determines your credit score that will largely decide your interest rate.

So, a credit report is your history of paying bills and debts, including the credit rating assigned to each account, that create your credit score, expressed as a number, to determine your creditworthiness.

Why is a credit score important?

Access to your credit score is a form of trust for these institutions. Your high scores will prove that you are trustworthy to the lenders and financial institutions.

With a practice of monitoring, you can easily achieve your financial goals or life plans with a good credit score in place. 

TransUnion and Equifax

There is TransUnion and Equifax, which have distinct differences to them. Bureaus such as these may differ in certain aspects. 

Every bureau uses a different algorithm to measure your credit scores.

Their entire models differ from each other. While higher scores in each indicate low credit risk, both of them have a different range.

Equifax ranges from 280 to 850, and TransUnion ranges from 300 to 900. One, or both bureaus receive requests from lenders regarding credit reports.

Credit scores are constantly updating. So, if you compare your credit scores on different dates, then they are more likely to differ in range. 

Credit score ranges in Canada

Canada has a credit score system that usually ranges from 300 to 900. Different lenders, however, have different criteria.

Lenders will believe that you pose no risk if they see higher numbers on your credit scores. For example, the “below-given” scoring model is based on Equifax Risk Score (ERS 2.0).

Before retrieving your credit report, lenders will consider your credit scores along with other financial information. 

ERS 2.0 scoring model

Always keep a note: a higher score means more perks and a lower score means fewer perks.

Excellent credit score – 741 to 900

You will have an excellent credit score if you have only a few late payments or none.

Regular payment of balances and low credit utilization also play a major role. If you have excellent credit, you can enjoy instant approvals, low-interest rates, higher credit limits, and access to premium cards, 

With excellent scores, banks will reward you endlessly to help their business as well. The median credit score in Canada is 749, which means half the population falls in the excellent credit scores category. 

Good credit score – 690 to 740

Canadians in this range occasionally make late payments, and credit utilization is low.

You will enjoy perks, much like those in the excellent category. However, there will be some exceptions to benefits that require only an excellent status.

Average credit score – 660 to 689

This category represents quite a few late payments to multiple lenders and defaults on loans. This displays an unbalanced credit history and will offer higher interest rates and some unsecured credit cards. 

Below average credit score – 575 to 659

A below-average credit score only offers  a higher interest rates that cost quite a bit with passing time. Very unlikely to be eligible for gainful credit cards, cashback, or rewards.

Poor credit score – 574 to 300

This credit score category displays a poor status. One might have defaulted on several loans.

The debt is almost or equal to the credit limit, which means a high credit utilization ratio. In usual cases of poor credit scores, people also have declared bankruptcy.

Eligibility for credit cards, cashback, and benefits are far from your reach in this range.

Low credit score and why

Yes, you have finally made it to the most-awaited section. This will answer your doubts about why your credit score is low and what lowers it.

Even a minor change can drop your scores drastically. The calculation is quite complex, and sometimes, it’s difficult to point out the reason for the credit score drop. Anyhow, we have listed down a few reasons that you could try self-evaluating.

Bills unpaid for above 30 days 

Payment history of bills or purchases makes a big, big difference in your credit score. Your credit reports will present a low credit score if you cannot make payments within 30 days of using credit.

Expensive items have been purchased

It is surprising to most people that the amount you pay for each item is also impacting. The expensive purchases and financial history determine your sense of responsibility to the bureau.

If the balance seems off, they are most likely to look into the matter. 

The incorrect account sent across.

You don’t just have to take care of credit cards and loans. Basic expenses like the phone bill or rent are important. Unpaid account reports can cause a drop in score. 

These are only basic factors to take into consideration, but this is your first step on the starting line. 

Improving your credit score in a month 

A credit report will show negative information on your report card for around seven years. This is why you have to wipe your slate clean of all the negativity to present good credit history.

Starting now seems like the best choice. These are some key steps that will help improve the majority of your credit reports and scores. 

Pay your bills on time.

Paying your bills every month by the due date is very important as it affects your payment history. Late payments are the majority aspect of dropping your credit scores.

In case you opt for online banking, try to do so a few days before your due date. This will ensure that your payment will process in time. 

Lower your credit utilization

Pay off your credit balances and other debts so that you use only a part of the credit.

For example, 75% is okay, 50% is better, and 30% is the best range to be in. Reducing your credit utilization up to 30% and maintaining it will bring no strikes against you.

Avoid credit inquiries

Frequent credit inquiries will show on your report and present you as an irresponsible consumer. You have to be in a prospective position for landlords and employers.

For hard credit checks, you will need to increase credit limit or apply for another credit product. 

Correct misunderstandings

Frauds are very common when it comes to credit scores.

To prevent fraudulent activities, make sure you’re regularly checking your credit report. In fact, easy access to your annual free credit report application allows you to curb frauds from your end.

If your report shows any misinformation or errors, immediately look into rectifying it. 

Errors on your credit report

Before trying different methods to rectify the errors, it is important to understand what the credit report documents. 

The credit report includes personal information like name, birth date, addresses (all), social security numbers, and employment history.

Financial information and public records include credit balances, limits, and payment history. Other examples are bankruptcy details, debt collections, hard inquiries, lawsuits, liens, and judicial judgments. 

Common errors include wrong names, addresses, or birth dates. Inaccurate statuses on accounts will also cause a problem.

Credit errors can damage your credit score if not rectified. This is why annual credit checks are extremely important.

To resolve such errors, you should immediately contact your credit bureaus and ask them to look into your claims. Don’t think twice before calling because this process is completely free in Canada.  

You can file a dispute with TransUnion online, and Equifax also has an easy online application to fix your credit report.

Student loan

Paying back student loans is a huge strain especially in the peak years. But here’s an alternative, credit!

Student loans can affect the credit scores in multiple ways depending on how one pays.

The repayment periods of the student loans help to add a long credit history to the credit score.

Similarly, regular loan payments help add up on payment history and late payments could lower the scores.

Let’s dig deep into how student loans affect the credit score.

Positive effects

Timely payments will bring your bar up by 35%.

Student loans are a great way for building a credit in your youth. Very few students own houses or cars under their names, and the student loans serve as an alternative.

The type of credit you use may be less impacting. But, in the long run, a student loan displays a variety in the credit report.

Since student loans have 10-year repayment plans and such, the length of the credit history increases on the report. This adds to the scores, and builds a good profile.

Negative effects

Regular payments help build the score, but late payments do the exact opposite.

Defaulting on loans or having frequent late payments does not look good for your score. In fact, the credit score will be irresponsible.

New student loans

A student loan affects a credit score all the time. It doesn’t mean that you will only be able to get a new student loan with a good credit score.

Federal Loans – These types of loans almost never require credit checks. They do, however, check for the ‘PLUS’ loans that are exclusive to parents and graduate students.

Private Loans – These types of loans require one of the borrower’s to have good credit.

A credit check takes place to determine whether you qualify for the loan or not. Higher credit score will help lower the interest rate of the loans. 

Credit score updates 

New accounts, payments, and collections paid off will affect a credit score.

Anything that requires you to send for your credit report, your score will be evaluated, simultaneously.

Duration of the information 

In Canada, your credit report keeps your information for about 6 to 7 years. However, different countries have different regulations. Here are some particular informational aspects that will remain on your credit report for a while. 

  • Bankruptcy details can stay for up to 7 years. 
  • Credit transactions paid late will stay for up to 6 years, starting from the final payment date.
  • Negative bank account information also stays up to 6 years.
  • Secured loans like mortgages or car loans will be up for 6 years as well.
  • Debt collection will stay on the report for a maximum of 6 years.
  • Legal judgments also stay for about six years on your report.

Calculating your credit score 

Credit bureaus weigh in certain factors from your report to calculate your scores. Even though it is difficult to estimate your score, the outcome of your credit score is in your hands. 

There are five factors with a certain percentage that the credit bureaus take into consideration. This will promote awareness on what’s really affecting your credit reports, so you can further resolve it.

Payment history (35%)

Your repayments on previous purchases, across all credits matter the most. Credit is a large allowance for you to spend. The bureau will pinpoint when or if you’re falling behind on your payments and if you’re spending irresponsibly.

History includes late payment details. These details include reasons for being late, how many times, amount remaining, and the overall record.

Payment history will also include major financial aspects like bankruptcy, loans, lawsuits, etc. 

Credit utilization (30%)

Credit utilization describes available credit compared to anything owed. The comparison between the two allows for the way you’ve handled your credits.

Since it covers around 30% of your credit score, which makes it second important to your payment history

For credit scores, lower numbers are not good. But for credit utilization, lower numbers are the best. 

In fact, credit utilization can be calculated through simple math. You add up your balances on credit cards and credit lines, then divide them by your total credit limit and multiply with 100

To calculate credit utilization, add the balances of credit cards and credit lines. Divide that by the total credit limit and multiply by 100.

If your credit limit is $10000, but you owe $3000, your credit utilization would be 30%.

The credit bureaus like Equifax suggest that you keep your credit utilization under 75%. Lower utilization percentages like 20% to 30% make up for the highest credit scores. 

An easy way to control your credit utilization is to pay off small balances every month. This will present you as a financially responsible person and boost your credit score. 

Length of credit history (15%)

This includes your entire credit history. The 15% determines how long your accounts were open, and when have you used them last.

Credit bureaus will include at least 6 months of credit history to create a detailed report. Lenders might require up, but not limited to 12 months. 

Before closing a credit account, be sure how it will affect your credit history. For instance, if you have two cards from 5 and 10 years, close the 5 year old card. It holds a less percentage over your credit history. 

New credit (10%)

New credit accounts, recent inquiries, and the length of time between inquiries accounts for new credit. These cover over 10% of your entire credit score.

Credit bureaus take your requests and inquiries into consideration.

There are two types of inquiries.

A soft inquiry refers to when you check your credit score on your own or get a quote online. This will not affect your credit score at all. 

A hard inquiry would include applying for a mortgage or a credit card, which could possibly have an effect. Generally, hard inquiries don’t raise any flags.

If you apply for multiple credits at the same time, then it will alarm the credit bureaus.

In the event of multiple inquiries, bureaus will combine them all for one set time. They’re aware that you won’t be getting 4 to 6 mortgages at once.

hey’re aware that you won’t be getting 4 to 6 mortgages all at once.  

Credit mix (10%)

Different types of credit bring different ratings to your credit scores and reports.

This percentage will include if you have two more credit accounts. Bureaus evaluate the number of credit accounts you have, such as:

  • Business loans
  • Retail Accounts
  • Education Loans
  • Car Loans
  • Mortgages
  • Home Equity
  • Credit Cards
  • Utility Bills

Take mortgages and credit card loans as an example. Paying your mortgage regularly will lead to a reducing amount over time.

But, in the case of credit loans, there can be fluctuation. This is why the bureau will see your credit card loan as a high risk one. 

having diversity will add up to your credit system. It is not as high as compared to other factors, but every tiny percentage can make a difference.

Yes, diversity will raise your score, but that does not mean you open new accounts if you plan not to use them. Overall, try to be responsible with your money, and you won’t have to worry about your credit score.

Accessing your credit score 

Don’t worry, you can find your credit scores in just a click. In fact, this is the easiest part to credit scores.

Canada provides your credit scores online for free. It is safe, secure, and will only take a few minutes.

Many financial tech companies from Canada aim to provide access to your free credit scores regularly. It could be weekly, monthly, or any other duration that you would prefer. 

Simply click here to access your credit score in minutes!

Credit score myths 

There are some common myths worth mentioning to avoid confusion.

Everyone only has one official credit score

No, that is the most common mistake people make believing this. Your credit scores are evolving and can change.

Two credit bureaus in Canada may gather different pieces of data and calculate their own scores.

This is why both bureaus will show you different scores. In fact, each bureau has a different purpose in calculating your credit scores.

For example, one lender may request data to approve a mortgage. Another may request data to approve a small loan. 

More income, higher credit score

Credits are based on the length of credit reports and the payment history. It doesn’t depend on how much money you make or how much you have in the bank.

Credit bureaus aren’t allowed to access this information. It’s personal and does not influence your credit scores. 

Getting a credit card increases score

Lenders only want to see you manage your credit well. This means credit usage is a major factor in determining what risk you pose.

Having one credit card for a financial strategy is smart, but make sure you use it responsibly. Keeping it inactive makes your report look average. 

Credit utilization does not matter.

Credit utilization covers 30% of your credit score and is one of two majorities for calculation. This is why it is extremely important to monitor and maintain its stability. Any higher percentage than 60% will describe your credit as irresponsible. 

Stop worrying about your credit score if your partners’ are good.

Lack of maintenance shows irresponsibility. Your own credit score shows that as an individual you are able to spend accordingly.

No need for annual monitoring

There is definitely a need for annual monitoring. This is why Canada allows accessibility to your credit reports at no cost.

Review your credit reports and scores to make sure the data is accurate and continues to be positive. 

Checking the credit score will affect your report.

Soft inquiries, checking your own scores, does not influence your credit rating or reports at all. However, hard inquiries lower your score if multiple lenders have requested to access your credit file.

Drowning in debt increases credit score.

This is absolutely false. Building up more debt will only bring your score down due to tremendous stress to repay it.

To keep a good score, apply for credit when necessary, pay off debt, and avoid crossing the 30% marks. 

Pay to check credit score.

Checking credit score services require payment but, there is an exception. Equifax and TransUnion offers free annual credit score checks.

Close one credit card to increase credit score

If you need to close a credit card account, feel free to do so. However, you don’t need to close one credit card to increase your credit scores.

Closing one credit card will negatively impact your score by lowering your total credit limit. If you wish to close one account, cut off a newer credit card that has a lower credit limit comparatively.

Length of credit history covers 15% of your scores, and every minor percent makes a difference.  

Online credit scores are the same as the one lenders’ request

No, that is not the case. Online credit scores that are accessible to you are not the same as the lenders’ request.

Lenders have different purposes for requesting your credit scores and will take income into consideration.

The one requested online does not prioritize income. 

Pay off collections to remove it from the credit report.

Negative data such as bankruptcy or judicial judgments stay on the report for 6 to 7 years. In Canada, multiple declared bankruptcies can keep the data on your report for 14 years. 

But there is an alternative, and bankruptcy does not necessarily ruin your credit score and report. Canadian agencies, Equifax and TransUnion, remove declared bankruptcy data after 6 to 7 years.

No debt equals to a perfect score.

Breaking free from your debt is the best feeling ever and is great for your finances. But, your debt depends on how you manage your overall finances and credit.

If you pay off on time, then you get a good score. If you lacked in managing your credit, then it will need some improvement. 

Takes ages to improve a bad credit score

This is partially false. It could take ages to repair all the credit damage done to your scores. But, with the right credit management tips, you can start to see your improvements in less than a few months. 

Factors like job and income influence credit score

If you access your credit score, factors like a job, income, savings, or investment accounts don’t have any role in our credit scores.

As long as you’re paying your bills on time and have other such good credit behaviors, you’re doing well. But one could have $10,000,000 of income and still have a poor credit score. 

Joint credit score for couples

Credit scores are never joint. Scores are completely individual to determine your financial responsibility.

If you have a joint an account with someone, the payment histories are reflected in both credit scores and reports. 

Only a credit repair company can improve your scores

Refrain from relying on a credit repair company completely.

They offer advice and credit score management services. However, no company can guarantee a good score unless you don’t contribute to it.

In the case of errors on your credit report, immediately contact the credit bureaus to resolve the correction. 

There is only one credit report for you.

Similar to your credit score, your credit reports will also differ.

Equifax and TransUnion credit reports mostly differ from one another.

Lenders request for several different purposes and receive distinct reports relevant to them. 

Final thoughts

Now that you’ve gained this knowledge on credit scores, you’re ready to apply it to the real world. As mentioned, several factors impact a credit score, so be aware of each.

Practicing responsible financial habits are the first steps. Simply check your credit score here, and start working on it right away. 

Let us go through some of the tips that help you to bring your credit scores up.

  • Pay off bills on time
  • Ensure low credit utilization by keeping it below 30% of your total credit limit
  • Refrain from applying for multiple credit cards
  • Credit mix and maintain a healthy distribution of credit
  • Last, don’t close your old credit cards, but maintain a good status

If you have a good score already, great!

If not, you are well-equipped to take matters into your own hands now.

This guide aimed to do its best to answer all your doubts and prepare you for a bright financial future.

Once your credit scores are in place, and you seem financially responsible, you will understand why it matters so much.

But, yes, the premium benefits are also tempting and will prove valuable for your usage. 

If you have any questions, leave it in the comments section below.

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