Understanding Credit Scores and Their Importance in Canada

A credit score is much more than a simple indicator; it's a fundamental pillar of the Canadian financial system. It can determine whether you qualify for a loan, want to buy a home, or even fit to live in an apartment. In this article, we explore in detail what a credit score is, how it's calculated, and what's essential to understanding it.

What is a credit score?

A credit score is a numerical score, usually between 300 and 900, that measures a person's ability to repay their debts. For example, a credit score of 750 is generally considered very good, while a score of 600 may indicate problems. Canada's major credit reporting agencies, such as Equifax and TransUnion, collect and analyze financial data to establish this score.

How was it calculated?

The credit score is calculated from the tenant's account using several key factors:

Payment history (35%): On-time payments are essential. A single late payment can significantly lower your score.

Credit Utilization (40%): It's recommended not to use more than 40% of your available limit. For example, if you have a total limit of $10,000, try to keep it under $4,000.

Age of Credit History (15%): The longer your accounts have been open, the better.

Types of Credit (10%): Having a mix of credit cards, auto loans, lines of credit, and mortgages demonstrates good credit management.

New Credit Inquiries (10%): Too many inquiries in a row can raise concerns among lenders.

An additional score of 740 is considered excellent and can help you qualify for better credit terms.

What is a good credit card in Canada?

• 680 to 724: Fair

• 725 to 759: Good

• 760 or higher: Excellent

Is a Credit Score Important?

Access to Credit

A good line of credit is essential for obtaining financial products. In fact, 79% of Canadians have a credit balance of $700 and a lower interest rate. This can represent significant savings. For example, for a $300,000, 25-year mortgage, a 1% interest rate can save you approximately $30,000 over the entire loan term.

Home Location

Currently, more than 50% of landlords and real estate agencies check applicants' creditworthiness before reserving a property. A high price can give you an advantage, while a low price can limit your options or result in high security deposits.

Security

Approximately 20% of insurance companies in Canada use creditworthiness to determine premiums. People with a good credit history can benefit from rate reductions, which can represent savings of 15% on half of their insurance policies.

Employment

In some industries, especially those involving money management, your credit score can influence your purchasing decision. A good price can strengthen your application and help you stand out in a competitive job market.

Strategies to Improve Your Credit Score

Pay Your Bills Temporarily

Respecting late payments is critical. Approximately 35% of your credit score depends on this. Make sure you pay all your bills on time, whether they're credit cards or utilities.

Reduce Your Debt

It's advisable to keep your credit utilization ratio below 40%. If your credit limit is $10,000, try not to exceed $4,000.

Avoid Excessive Credit Inquiries

Limit credit inquiries. An inquiry can temporarily lower your score. Focus only on the truly essential cells.

Credit Report Checker

Review your report regularly for errors. Canadians are entitled to a free credit report from each credit reporting agency. This can help you identify inaccuracies that could affect your score.

Current Errors to Avoid

Ignoring Errors on Your Credit Report

Don't ignore inaccuracies on your report. Any errors that could affect your account should be immediately reported to the credit bureau for correction.

Closing Old Accounts

Although it may seem logical, closing old accounts can reduce the length of your credit history. This can negatively affect your credit score. Keep these accounts open even if you don't use them frequently.

Not Diversifying Your Credit

Having a diverse portfolio of credit types can have a positive impact on your credit score. If your portfolio doesn't include credit cards, consider adding a personal or car card to balance your profile.

Myth vs. Reality: Correcting Some Outdated Ideas

"Having a credit card hurts my credit score." → False. On the contrary, a well-designed card will improve your score.

"Paying only the minimum is fin.e" → False. Even if you pay the minimum, your interest remains. They become inactive and accumulate.

"I have to avoid credit altogether to get a good score." → False. To build a good score, you must use credit responsibly.

The Importance of Your Credit Score in Your Life

Your credit score is essential to your financial life in Canada. It influences not only your ability to get loans, but also crucial aspects like housing location and insurance rates. By understanding how it works and taking steps to improve it, you can ensure a stable financial future.

Monitor your credit score regularly and make informed decisions about your finances. By taking a proactive approach, you can not only improve your score but also prepare to achieve your future financial goals.