Establishing a good credit score in Canada is easier than you think. A good credit score always begins with smart spending. Be responsible, watch your accounts and know a few rules of thumb.
Your credit score will determine whether you get approved for the credit card, mortgage, line of credit, or car loan you’re looking for. It can make the difference between a low interest rate and a suffocating rate. Managing your credit score makes life a whole lot easier and cheaper. Here are a few tips.
What is a Credit Score?
A credit score is a number (between 300-900 in Canada), which summarizes your risk of defaulting on a loan and/or how profitable you might be to a lender. Financial institutions may also use other criteria to evaluate your application, such as income or homeownership. But in general, your credit score is a good indication of your credit worthiness.
The exact algorithm for your credit score is a closely guarded secret. However, a few rules of thumb are as follows:
- Payment History (35% of credit score): Making a payment on time raises your score. Making a late payment kills it. Recent payments have a greater impact, than older payments.
- Outstanding Balances (30% of credit score): Your debt should typically not exceed 30% of your credit limit. Above 30% and it reflects negatively on your creditworthiness.
- Length of Credit History (15% of credit score): The older your credit accounts the better. Newer ones are less trustworthy. The longer your credit history, the better.
- New Credit Inquiries (10% of credit score): Too many credit inquiries or too many new credit lines in a short period of time looks like you need credit – a bad signal.
- Diversity of Credit Used (10% of your credit score): The more types of credit products the better.
Difference Between a Credit Report and Credit Score
A credit report lists what credit products you have, with whom, how much is being used and your history of payments.
A credit score is a number which summarizes the information from your credit report for lenders to determine your risk of defaulting on a loan and/or how profitable you might be for them to lend to.
Each Canadian is entitled to receive one credit report for free, each year, from either of Canada’s two credit reporting agencies, TransUnion and Equifax. If you’re denied credit, you’re also entitled to your credit report. Your credit report does NOT include your credit score. The agencies do not make it particularly easy to get your credit report, you’ll have to make your request over the phone or in writing and send it by mail. You will also have to include a copy of two pieces of I.D.
Where Can I Get My Free Credit Score in Canada?
Unfortunately, Canada doesn’t have any services that offer a free credit score, like they do in the United States. In order to receive your Canadian credit score, you’ll have to subscribe to a paid service from either TransUnion or Equifax. With the paid subscription you will typically get your credit report, credit score and monthly fraud and identity theft monitoring. You’ll also be able to get your credit score and report instantly.
Both TransUnion and Equifax currently charge $16.95 a month for updated credit reports, scores and fraud monitoring services.
What is a Good Credit Score?
Your score depends on the credit rating agency. Typically, a credit score of 700 or above will give you carte blanche with just about any bank for just about any product. If you’re in the 660 range you’ll be ok for most mass market products. Get into the low 600’s or 500’s and you’ll start to have problems.
How Do I Raise My Credit Score
- Don’t make late payments. Ever. Use automated payments to avoid being late – no excuses.
- Don’t max out. Keep your debts lower than 30% of your credit limit.
- Get a credit card. If you’re a student, get a student credit card. If you’re older and establishing credit you may have to get a secured credit card – but don’t get a prepaid card, it won’t help you establish credit, at all.
- Don’t apply for a bunch of credit cards all at once. The sign-up bonuses may be attractive, but space out the applications.
- Review your credit report at LEAST once a year. Sometimes they can make errors that can wreak havoc. Get them fixed.
- Don’t close your no fee credit card accounts. It costs you nothing, raiseses your average account age, and increases your overal outstanding credit lines, which effectively reduces your debt to credit limit ratio.
Getting your free credit score may not be possible, but it might well be worth the effort to pay for it. If you do, you’ll get access to your credit score, credit report, and fraud monitoring services. With so much riding on your credit score, keeping an eye on it may well be worth the cost, considering the alternative.