If you’re living in Canada and are asking yourself ‘what is a credit score?’, it’s worth going over the basics of credit, how it works, and how it affects your financial life.
Credit is your ability to borrow money, goods and services which you then pay back at a later date. Your access to credit depends on whether lenders are confident that you’ll eventually pay back what you owe – alongside any additional fees or interest.
Instead of relying on blind trust or reputation, creditors judge your ability to pay back what you’ve borrowed based on a more objective list of reports. These reports include various factors that affect your final credit score, including:
- Any loans you’ve taken out in the past
- How many of your loans have been paid back
- Whether loan payments were made on time
- Any financial setbacks such as car repossessions and bankruptcies
These reports are then distilled into a three-digit number that gives lenders a good indication on whether you’re likely to repay on your debts in good time – also known as a credit score. As your financial circumstances change, so does your credit score.
Why Should I Care About My Credit Score?
Many of life’s major purchases – from homes to cars – are only accessible to the average Canadian through a line of credit like a loan. A higher credit score can generally increase your likelihood of successfully qualifying for them.
Another reason to care about maintaining a good credit score is the interest paid on top of loan repayments. Interest rates can be significantly affected by your credit score because it tells lenders how risky it is for them to lend money out to someone.
If you have a lower credit score due to increasing debts, you may still qualify for a mortgage or repayment plan but this line of credit will come with a higher interest rate. Similarly, if you have a higher credit score, the interest you pay on your credit is likely to be lower because you’re seen as more likely to pay it off in time.
Interest can differ by mere percentage points but even a 1% increase in interest on high-ticket loans like mortgages can translate to a cost of thousands over the lifetime of a homeowner. In this way, the difference between a ‘good’ and a ‘fair’ credit score can translate to great cost over time.
Credit Score Ranges in Canada
But what exactly is the difference between a ‘good’ and a ‘fair’ credit score? What does this range of credit scores mean for the average Canadian?
Generally speaking, credit scores in Canada are split into five ranges:
Excellent: 760 – 900
Very Good: 725 – 759
Good: 660 – 724
Fair: 560 – 659
Poor: 300 – 559
Each of these ranges means different things for Canadian consumers, including whether they will be approved for credit and at what rate of interest.
As we’ve mentioned, the lower the score, the higher the interest on any successful loans. If you have a ‘poor’ credit score due to mismanaged debts you may struggle to qualify for any line of credit at all, and your interest may reach heights of 50%.
On the other hand, if you find yourself with an ‘excellent’ credit score, you can expect the lowest interest rates possible.
What is the Average Credit Score in Canada?
If you already know your credit score, you may want to know what the average credit score in Canada is. How does yours compare to your fellow Canadians in similar circumstances to you?
According to one of the main credit bureaus in Canada, TransUnion, the average Canadian credit score is about 650. This means that the average person in Canada needs to put some work into improving their credit score if they want to qualify for loans with more lenient interest rates.
How Do I Improve My Credit Score?
If you, like the average Canadian, could use some help with improving your credit score there are some steps you can take. Some are small and can be done in a matter of days and some may take time and patience to achieve.
- Register your address on the electoral roll – This confirms your name and address to lenders so they know you are who you say you are.
- Make regular payments on time – An easy starting point for this is by ensuring that all your utility bills are paid via direct debit. Personal monthly subscriptions to services like Netflix and Spotify also count.
- Build your credit history – This can include getting started on credit builder cards that have low spending limits and high interest rates. Used responsibly over a matter of months, these can reliably build your credit score over time.
- Avoid getting into an unmanageable debt – You’ll struggle to reach the higher credit score ranges if lenders see that you have a history of unpaid debts. Where possible, try not to get into debts that you don’t know you can pay off.
Credit In Consumer Proposals/Bankruptcy
The Office of the Superintendent of Bankruptcy reports all Proposal filings to Canada’s credit reporting agencies (Equifax, TransUnion) and reports when your obligations have been fully performed.
It is illegal for the Trustee to communicate with the bureau. The Trustee does NOT have control over the bureau’s reporting, nor their methods. From our experience the following effects will be had on your bureau once a Proposal is filed:
1. Your credit score will drop roughly 50-150 points;
2. This effect will take roughly 6-18 months to occur;
3. Once the effect is completed, your score will rise 3-5 points per month;
4. The increase may require you to review your credit and ensure that everything is reporting correctly.
• In the ‘Insolvency’ section of your report the Proposal will show an open status during the Proposal, a failed status if you fail the Proposal, or a completed status when the Proposal is completed
• The proposal will remain in that section until the sooner of:
o 3 years from the time you complete the payments of the proposal; or
o 6 years from the day the Proposal is filed.
Your credit score can be rebuilt by making payments to your creditors on time, using less than 30% of your available credit and maintaining good habits over a period of time.
The Trustee does NOT have access to your credit report. You can obtain a FREE Equifax report through Borrowell: https://bit.ly/3r4Bdik
If you urgently want your credit report fixed you can file a dispute with the credit bureau directly using the attached documents following these links:
TransUnion/Credit Karma: https://www.transunion.ca/assistance/credit-report-disputes#articleSection1
How Can I Check My Credit Score?
So, we know what credit is and how credit scores affect the average Canadian, but what if you want to check your credit score for yourself?
You can obtain your credit report online from one of Canada’s two main credit bureaus, Equifax and TransUnion, who maintain credit files for Canadian consumers
You can access your credit score from either of these firms through the Government of Canada website.
Need Debt Advice? Speak to Harris & Partners
Credit score can have a major impact on your purchasing decisions throughout your life. If unmanaged debts are stopping you from qualifying for low-interest loans, or if you’re being turned down for regular forms of credit then speak to our Insolvency Practitioners. An initial conversation with us is free, confidential and could help you improve your credit score.
Get in touch here.