Your credit score is important because it is one of the tools used by financial institutions to determine whether or not you are eligible to receive a loan. So, it would be a good idea to check your credit score before applying for a loan to assess your chances of being accepted and estimate the interest rates you may be able to access. In Quebec, Equifax and TransUnion are the two credit bureaus responsible for producing your file and your credit score. This article will help you better understand how your credit score is calculated and how to properly read your credit report.
What is a credit score?
The credit score is calculated by the two credit bureaus in Canada, TransUnion, and Equifax, to assess the risk you present to lenders. More specifically, a credit score is a three-digit number between 300 and 900. The higher your credit score, the lower the risk you represent and the more likely financial institutions are to do business with you.
How is the credit score calculated?
Credit scores are calculated based on five factors, each with its percentage importance:
- Your payment history (~35%). It is important to make all your payments on time, because any delay of more than 30 days, regardless of the amount, will be automatically recorded in your file. Your rating will be devalued and the delays will remain on your file for six years.
- Use of credit (~30%). It’s best to limit your credit usage to 50% or less of your limits to avoid hurting your rating. If, for example, the limit on your credit card is $5,000, you should avoid putting more than $2,500 on it.
- Length of credit history (~15%). It is important to avoid opening bank accounts unnecessarily and then closing them. Indeed, you must keep your accounts open as long as possible because this shows that you have good financial habits and promotes a good credit rating.
- New credit (~10%). The more you apply for credit, the more your score will be negatively affected.
- Mixed credit (10%). It’s good to have more than one type of credit, like a car loan, mortgage, or line of credit. However, you should avoid having several of the same types of credit, such as several credit cards.
What do credit score scales mean?
Although each lender and creditor interprets credit scores differently, here is how credit scores are interpreted in general:
780+ Excellent A credit score above 780 is considered excellent. Individuals with a score of 780 or higher are virtually certain to be approved for a loan and can take advantage of the best interest rates.
720-779 Very good Scores between 720 and 779 are above average and people with such a score also enjoy excellent interest rates and are almost certain to be approved for a loan.
680-719 Medium Although such a rating is still good, individuals in this category will receive somewhat higher interest rates, but should have no difficulty in receiving a loan.
580-679 Poor People with a score between 580 and 679 are considered high risk. It may be difficult for them to get a loan and if it is approved, it will be at a much higher interest rate.
579 or less Very poor It would be difficult for people with a score of 579 or less to be approved for a loan as they are considered very high risk.
What is considered a good credit score?
In general, in Canada, credit scores above 680 are considered good, and scores above 800 are excellent. Lenders may have their standards for ratings and what is considered a good rating by one lender may be unsatisfactory for another.
How to read the credit file?
Credit reports contain your personal and financial information to paint a picture of the type of borrower you represent. It is advisable to check your credit report regularly to ensure that the information it contains is correct and that there are no errors. Checking your credit report regularly also allows you to quickly identify if you are a victim of fraud or identity theft.
What information appears in your credit report?
Here is the type of information that might be in your credit report:
- Date of Birth
- Phone number
- social Security number
- Driving license information
- Passport number
- Your past and present employers
- Your credit transactions (credit card, personal loan, car loan, line of credit, etc.)
- Internet and cell phone account
- Credit inquiries by creditors, lenders, landlords, and employers
- Information regarding bankruptcy, consolidation, and debt management programs
- Legal judgments
- Credit accounts in collection
- Accounts closed due to fraud committed by the account owner
- Fraud alerts
- Identity checks
FAQs on credit score scales
What is a bad credit score in Canada?
In Canada, credit scores range between 300 and 900. If you have a score of 579 or lower, you are considered a very high risk by creditors and lenders. Bad credit prevents you from being approved for loans or having access to affordable financial products. Fortunately, you can improve your credit rating by adopting good financial habits, such as paying your credit cards on time or using a smaller percentage of your credit limit.
Can I get my credit score for free in Quebec?
In Quebec, it is possible to obtain your credit file and score free of charge from Equifax and TransUnion. Some banks will also offer credit scores for free to their users. Finally, it is possible to use certain services such as Borrowell or Credit Karma to obtain your rating for free.
How can I improve my credit rating?
Here are some suggestions for improving your credit rating :
- Only spend 30-35% of your credit limit.
- Pay all your accounts on time or in advance.
- Limit yourself to one credit card.
- Avoid making a lot of credit applications.
- Be sure to keep your accounts open for long periods.
- Diversify your credit products, but make sure you can make all your payments.
What is the minimum rating to obtain a mortgage loan?
Most financial institutions will require a credit score of 660 or higher to approve you for a mortgage. If your score is below 660, it may be best to wait and improve your credit before applying. It is also possible to apply with an alternative lender if your score is below 660.
Is a credit score of 700 considered good?
Yes, a rating of 700 is considered good by most creditors. Note that each lender or creditor may have their interpretation of credit. So what is considered a good rating can vary from creditor to creditor?