Credit Scores and Credit Reports Explained
Did you know that improving your credit score can save you thousands of dollars in interest? Better credit scores mean lower rates on mortgages and other loans, cheaper insurance and access to better credit cards.
This guide explores how credit scores work, what is in a credit report and how to build your credit score.
What is a credit score?
Think of a credit score as a grade of how you handle credit. The number ranks your creditworthiness and ranges from 300 to 900. The higher that number, the more likely a financial institution is to lend to you.
Credit scores simplify the more complex story from your credit report, which shares details about what you have borrowed, when, your payment history and outstanding debt.
Credit scores and reports help creditors decide to whom to extend credit. Lending can be risky, so a good credit score makes lenders comfortable giving you a personal loan, high-limit credit card or mortgage.
While credit scores are important, they are only one piece of the puzzle. Lenders use it to make a quick judgement about your potential creditworthiness. Then they dive into your credit report for more details. We will do the same by looking at credit reports next.
Get your free credit score
What is a good credit score?
A good credit score is at least 660. Some lenders require a very good or excellent score to access some products and the best rates. Credit scores reflect how risky your profile is to a lender. They range from poor (under 559) to excellent (above 760).
Good to know
The average credit score in Canada is 650.
Remember that your credit score is not the only factor impacting lenders' decision to extend credit.
Let’s say that you apply for a car loan. The lender will look at your employment history, monthly income and the value of the car. If the loan makes sense to them, your credit score can make the difference. A great credit score can open up a better interest rate.
What is a bad credit score?
Poor credit scores are under 574. Banks, lenders, and landlords will consider you a financial risk if your score is in this range. Expect high rates and unfavourable terms if they are even willing to lend.
Fair credit scores are between 575 and 659. Credit cards, loans and forms of credit are available at this range, but they may have higher interest rates.
Did you know that bad credit doesn’t only hurt your ability to lend?
Landlords, employers and insurers may also check your credit score. It isn't fair, but this can mean getting turned down for that great apartment, not getting the job or paying higher insurance rates.
Need to improve your credit score? A credit builder loan can help.
What is a credit report?
Credit bureaus start compiling your credit history into a credit report the first time you get credit. For a young adult, this usually means a first credit card, a private educational loan or a cell phone on an installment plan.
Your credit report contains information about the credit you have taken out and how diligently you have paid it back. Here is some of the information that may be included in your credit report:
What is in a credit report?
Here is how to read your credit report. It begins with personal information, then shows credit inquiries, followed by banking information and public records. These are examples of what you can expect to see under each category.
- Address (past and present)
- Social insurance number
- Employers (past and present)
- Job titles
- Drivers License
- Credit card application
- Car loan applications
- Mortgage application
- Age of accounts
- Types of accounts (car loan, credit card, mortgage, etc)
- Outstanding debt
- Payment history (on time or missed)
- Debt sent to collections
- New credit inquiries
- Consumer proposals
Credit reports rate items with letters and numbers. Here is how to decode them:
Letters on a credit report refer to the type of loan. For example:
|I||Installment credit: You borrow money for a specific period making regular payments until you pay it off.||Personal loan|
|O||Open status credit: You may borrow up to a specific limit when needed.||Line of credit|
|R||Revolving or recurring credit: You may borrow money on an ongoing basis up to a specific limit. You make regular payments in varying amounts depending on the outstanding.||Credit card|
|M||Mortgage: An installment loan on your principal residence.||Mortgage|
Next, the number rates your repayment history for that item from 1 to 9. The lower the number, the better.
|2||Late payment: 31 to 59 days late|
|3||Late payment: 60 to 89 days late|
|4||Late payment: 90 to 119 days late|
|5||Late payment: more than 120 days late|
|7||Making regular payments using a debt management option:|
Finally, do you see derogatory or delinquent on your credit report? Here is what it means.
What does delinquent mean on a credit report?
Delinquent refers to a missed payment. A single late payment is unlikely to hurt your credit score significantly if you get caught back up. When you realize you missed a payment, reach out to the lender and correct it as soon as possible.
What does derogatory mean on a credit report?
Derogatory is used for very late payments. Derogatory marks on your credit report seriously harm your credit score. These marks can stay on your credit report for up to 6 years and impact your ability to get new credit.
Who can access a credit report?
Organizations and individuals who may request your credit report include:
- Automobile dealerships
- Cell phone providers
- Financial institutions
- Insurance companies
Most Canadian provinces require them to have your written consent first. You sign this over when you apply for new credit. Nova Scotia, Prince Edward Island and Saskatchewan are exceptions to this rule. Those provinces only require a business or individual to inform you that they are checking your credit report.
What affects a credit score?
Your credit score is informed by what is in your credit report. TransUnion and Equifax weigh these categories to determine your score. Here is how the scoring works.
|Payment history:||Do you always pay your bills in full and on-time? That is a sign of a reliable borrower and will increase your score.|
|Credit utilization ratio:||How much you can borrow vs how much you do affects your credit score. Maxing out credit cards and lines of credit will drag down a score, so use a fraction of what you could. If you carry a balance from month to month, try to keep it under 30% of what you are approved for. Have a $10,000 credit card limit? Aim for under $3,000.|
|Account age||A lengthy repayment history helps your score. You need to show years of responsible credit use to get the very best scores. Note that opening a new account can temporarily drop your score.|
|Public Records:||Bankruptcies, consumer proposals and bills sent to collections hurt your credit score.|
|Inquiries:||Lenders check your credit report when you apply for a new loan. Multiple hard inquiries temporarily hurt your credit score because they can indicate a cash flow issue. Planning to apply for a mortgage soon? Skip the personal loan or credit card application until afterwards.|
How to improve my credit score?
Using credit responsibly is the best way to increase your credit score long-term. That means having a mix of credit, always paying it back and maintaining a debt utilization ratio under 30%. It makes sense. Before lending you $500,000 for a mortgage, a bank wants to know you pay back debts reliably and have something like a paid-off car loan under your belt.
Here are some actions you can take right now to start improving your credit score:
- Check your credit report and score carefully. You can dispute any inaccuracies.
- Pay your bills on time and in full.
- Keep a low balance on your lines of credit.
- Keep old credit active: closing an account increases your debt utilization ratio and lowers the average age of your accounts.
- Consider taking out a secured credit card or a credit builder loan with companies like KOHO.
- Regularly use credit for small purchases (say a tank of gas) and pay it off.
- Pay down as much as you can to improve your credit utilization
Besides that, there are services that can help you to repair your credit score.
These tips can help you boost your credit score in a few months, which may make all the difference the next time you need credit. It requires years of disciplined use to get your credit score to 800 or higher. Be patient.
When you have very poor credit, a fix won’t happen overnight. You may need years of responsible use to earn a good credit score. A credit builder loan or secured credit card can help.
How do I check my credit score?
The easiest way to check your credit score is through the link below:
Get your free credit score
You get your free credit reports directly with both TransUnion and Equifax. Note that Equifax includes your credit score with the report, but TransUnion does not for non-Quebec residents. If you go through Equifax and TransUnion beware of upselling to their subscription credit monitoring services.
Check credit report by mail:
- Make your request in writing using the forms provided by Equifax and TransUnion
- Provide copies of two pieces of acceptable identification, such as a driver's license or passport
- You must receive your credit report by mail
Order credit report by telephone:
|Credit bureau||Phone number|
|TransUnion Canada:||1-800-663-9980 (everywhere except Quebec)|
1-877-713-3393 (for Quebec residents)
Confirm your identity by answering several personal and financial questions. The bureaus may request your Social Insurance Number, credit card number and other sensitive information to confirm your identity.
Access your credit score for free from your bank:
Some banks offer their customers free credit reports. Here is where to request it through some of Canada's largest financial institutions:
|Bank||How to Check Your Credit Score|
|RBC||Get your credit score with RBC|
|CIBC||Get your credit score with CIBC|
|Scotiabank||Get your credit score with Scotiabank|
|BMO||Get your credit score with BMO|
Note: that TD Bank does not offer customers direct access to their credit score at this time. Instead, it refers them to Equifax and TransUnion.
How long does it stay on a credit report?
Bankruptcies, consumer proposals and bills sent to collection agencies impact your credit score for years. Here is how long you can expect each to stay on your report.
|Bankruptcy||Up to 7 years|
(14 years for multiple bankruptcies)
|Consumer proposal||The first of|
|Collections||Up to 6 years|
|Credit checks||Up to 2 years|
|Missed or late Payment||6 years|
|Debt management plans||2 years after the debt is paid|
Good to know
Why did my credit score drop?
Many things can cause a credit score to fall. Here are the most common:
- Late payments
- Credit inquiries,
- A bill in collections
- A closed account
- A high debt utilization ratio
Not sure why your credit score dropped? Check your credit report for inaccuracies. Sometimes incorrect information can end up on your report. Once in a while, something is sent to a collection agency that should not have been. You can and should dispute inaccuracies.
How can I fix an error on my credit report?
If you feel that there is an error on your credit report, you can dispute it directly with Equifax or TransUnion. For both, you’ll need ID and proof supporting your dispute claim. This may include:
- Proof of identity (government-issued ID, birth certificate)
- A bill confirming your name and address
- Account Information (a letter from creditors, bank statements, proof of identity theft)
- Bankruptcy discharge paperwork, release letter from creditors
Dispute inaccuracies on your Equifax credit report online or by phone.
The form is available here. Submit online or print it and mail it to:
|Equifax Canada Co.|
Consumer Relations Department
Box 190 Jean Talon Station
Dispute inaccuracies on your TransUnion credit report online, by phone or by mail.
TransUnion Consumer Relations Department
P.O. Box 338, LCD1
Centre de relations au consommateur
3115 Chemin Harvester,
Suite 201 Burlington ON
What credit score do I need for a car?
A credit score in the mid-600s is enough to get a car loan from traditional lenders in Canada. They will also look at credit history, employment history and income. The difference between a higher and lower credit score is how competitive a rate you can get.
For example, someone with a 760+ credit score might be eligible for a 3% rate, someone with a 650 4.5% and someone with a poor credit score under 560 paying 15%.
Below that, it becomes more difficult or expensive to get credit from them. Borrowers with a poor credit history can apply for a car loan through alternative or online lenders. Just be aware that they may charge more and offer less flexible terms.
!Have a bad credit score, but want to go for a traditional lender? Ask a trusted family member if they can be a co-signer. This makes your co-signer responsible for your loan should you default or miss payments. It reassured lenders and can make all the difference.
What credit score do I need for a house?
Dreaming of owning a home? The Canada Mortgage and Housing Corporation requires at least one borrower on a mortgage to have a credit score above 600. It underwrites most mortgage loan insurance in Canada, which is required when borrowers have less than a 20 percent down payment. Credit scores under this threshold will have a difficult time finding financing for a new home.
What credit score do I need for a credit card:
There are so many credit cards on the market that borrowers with almost any credit score can get their hands on one. The best credit cards require borrowers to have an above-average salary and a very good to excellent credit score.
Borrowers with fair to good credit are eligible for many credit cards.
Borrowers with poor credit scores can try a secured credit card to enjoy the convenience of paying with a card while improving their credit.