Credit scores play an essential role in your financial health and are used by lenders and creditors, as well as employers and landlords. But, despite all the information available on Canadian credit scores, they can still seem intimidating at first — especially if you’re not sure whether your score will work in your favor.
However, the role of credit scores is easy to grasp if you understand one core principle: Any form of credit relies on trust. You trust the lender to provide favorable terms and rates, and the lender trusts you to repay your loan. Credit scores help facilitate that trust.
In this guide, we’ll take a close look at the differences between a credit score and a credit report; who is responsible for calculating your credit score and how they do it; and how you can check yours. Along the way, we’ll also debunk a few credit score myths and explain how you can maintain a great score.
Table of contents
What Is a Credit Score?
A credit score is a three-digit number used to represent your credit risk to lenders. In Canada, the number ranges from 300 to 900 and helps lenders assess how likely you are to pay back your loan on time: A high score indicates a higher level of credit trustworthiness, whereas a lower score suggests a greater risk of defaulting on your loan payments.
Essentially, most of your financial undertakings revolve around this three-digit number. But, it’s also a lot more ubiquitous than you might think. For example, a lender will use your credit score to determine whether your mortgage loan application is approved and may also be used to assess you when you apply for rental housing or rent a car. In some cases, an employer can also request a credit check when you apply for a job.
In addition to telling lenders how risky it is to give you a loan, your credit score also has a direct effect on the loan terms: A high credit score results in a higher credit limit and lower interest rates, while a low credit score leads to penalties, such as higher interest payments and fees.
What Is a Credit Report?
A credit report is a summary of your credit history. It’s created by credit bureaus when you apply for credit for the first time and also compiles information that the bureaus receive from your lenders and other creditors. Like your credit score, your credit report helps lenders assess your creditworthiness and has a direct influence on your ability to take out a loan.
Specifically, your credit report includes two main types of information:
- Identifying Information: Your name, address, date of birth, phone number, Social Insurance Number, driver’s license, and current and previous employers
- Financial Information: Your current loans; credit usage; payment history to lenders and service providers, such as your phone or internet company; bankruptcies and other financial delinquencies; credit inquiries; and factual information about your account, such as when it was opened and how much you owe
Note that your credit report does not include information about your income, ethnicity, medical history, criminal record, cash purchases paid in full or bank account balances. It also doesn’t include your credit score. However, the information in your credit report is used to calculate your credit score, and your score will change as the report is updated.
Likewise, the information found in your credit report will also change over time. For instance, negative information — such as bankruptcies and late payments — will remain on your report for around seven years. Meanwhile, positive information — such as active or closed accounts that are paid as agreed — stay on the report for 10 years.
What Are Credit Reporting Bureaus? How Many Credit Reporting Bureaus Are There in Canada?
In Canada, both your credit score and your credit report are created by credit bureaus. Also known as consumer credit reporting agencies, these are companies that aggregate, compile and share information about your credit status. And, although they don’t make the lending decision themselves, credit bureaus provide lenders and creditors with the background information they need to approve or deny your credit application.
In Canada, there are two main credit bureaus: Equifax and TransUnion. Both of these companies receive information from your creditors, like banks or credit card companies, as well as businesses and governmental agencies, such as courthouses. Then, when the information is compiled into a credit report, it’s provided to lenders and other financial institutions; insurance companies; employers; landlords; or other service providers.
Users can also access their credit information directly via Equifax or TransUnion or via tools such as Borrowell, Credit Karma or Mogo. All these organizations also offer credit monitoring services, which notify you when there’s an update to your credit file or if there’s a change in credit activity. For example, you would be notified if your credit card were used in an unusual buying pattern — which could suggest that it’s been stolen — or if someone were trying to take out a loan in your name, which could indicate fraud.
How Are Credit Scores Calculated?
Canadian bureaus use either FICO Score or VantageScore credit rating models as a foundation to calculate your credit score. According to FICO, 90% of Canadian lenders use their model, although some lenders prefer credit scores calculated with the VantageScore model. Alternatively, Equifax and TransUnion use proprietary formulas to calculate credit scores, in addition to relying on FICO and VantageScore.
Granted, none of these formulas are disclosed to the public, so it’s impossible for the average person to calculate their credit score on their own. Nevertheless, credit bureaus do provide a list of factors that affect credit scores, which you can use to get a general idea of how healthy your credit is.
Below are the credit score factors used by FICO and VantageScore models:
Payment history
Your payment history is used to assess whether you’re making loan payments on time; if you have any late or missed payments; how often late payments occur; and how many of your credit accounts are delinquent.
Amounts owed & credit usage
The more credit you use, the larger the amount you owe. Therefore, if you utilize a high percentage of your credit limit, lenders could perceive this as a greater risk that you might make late payments — which is why experts recommend keeping your credit usage ratio below 30%.
Credit length
All lenders prefer a long-term credit history. As such, your credit score will also consider the length of time that you’ve had your credit accounts, as well as when you last used them.
Credit type
Both scoring models will also consider a selection of credit cards, retail accounts, finance company accounts, installments, and mortgage loans to calculate your credit score. This factor helps lenders determine whether you can juggle different types of credit responsibly.
New credit
Notably, opening several credit accounts in a short period of time can suggest that you’re a risky borrower — especially if you don’t have a long credit history.
What’s the difference between VantageScore & FICO credit scores?
Both FICO and VantageScore use the information in your credit report to calculate your credit score. Their goal is to help predict how likely you are to fall at least 90 days behind on payments throughout the next two years. And, while they ultimately serve the same goal, there are a few differences between them.
For example, both models take into account late payments. But, while FICO treats all late payments the same, VantageScore has harsher penalties for late mortgage payments. Both models also penalize consumers who have multiple hard inquiries in a short period of time (more on that below), but inquiries that are the same type are considered deduplication. Meanwhile, FICO considers all similar credit inquiries made within 45 days as a single inquiry, whereas VantageScore uses a 14-day timeframe.
Last, but not least, FICO requires a minimum credit history of six months and at least one account reported to the credit bureau within six months. Conversely, VantageScore is better suited for consumers without a long history. The company requires only one month of credit history and one account reported in the past two years.
Credit Score Ranges
Having a good credit score opens the door to a wealth of financial possibilities. But, what do lenders consider a good credit score? Let’s start by taking a look at the FICO credit score range used in Canada.
| Rating | Score Range | Score Meaning |
|---|---|---|
| Exceptional | 800 or higher | Demonstrates to lenders that the consumer is an exceptional borrower |
| Very Good | 720 to 799 | Demonstrates to lenders that the consumer is a very dependable borrower |
| Good | 640 to 719 | Most lenders consider this a good score |
| Fair | 580 to 639 | Some lenders will approve loans with this score |
| Poor | Less than 579 | Demonstrates to lenders that the consumer is a risky borrower |
According to FICO, anything between 640 and 719 is considered a good credit score. Yet, what lenders consider “good” is a bit more nuanced. Here’s what different credit scores mean and how they affect you as a borrower.
What is an exceptional credit score?
An exceptional FICO credit score is 800 or higher. This tells the lender that you’re an excellent borrower — which gives you significant negotiating power. It also means that you’re very likely to be approved when applying for new credit and, as such, you’ll probably be offered the best lending terms, such as the lowest interest rates.
What is a very good credit score?
A very good FICO credit score is between 720 and 799 and demonstrates to the lender that you’re a dependable borrower. In this case, you’ll have a high likelihood of qualifying for a loan from Canada’s major lenders; refinancing loans at better rates; and signing up for a credit card with relatively low interest rates.
What is a good credit score?
A good FICO credit score in Canada ranges between 640 and 719, which most lenders find acceptable. A score of 680 or higher is enough to qualify for a mortgage with Canada’s top lenders, however, it may not be enough to give you access to low-interest personal loans.
What is a fair credit score?
A fair FICO credit score is between 580 and 639. If you have a fair credit score, the vast majority of lenders will consider you a risky borrower.
However, having a fair credit score doesn’t necessarily mean that your hands are tied. In fact, according to TransUnion, the average credit score in Canada is actually around 650. Also, the minimum credit score for mortgage approval is 600. So, while you may incur penalties like higher interest rates, getting a loan is still within the realm of possibility.
What is a poor credit score?
A FICO score below 579 is considered poor. It tells the lender that you’re a risky borrower and, at this point, it’s unlikely that you will qualify for a mortgage loan. Moreover, you may even incur penalties — such as being required to place a cash deposit when applying for a credit card. You may also encounter difficulties renting an apartment, miss out on career opportunities, or even encounter challenges with utility providers.
Why do credit scores vary between different lenders?
Sometimes, the credit score your lender is looking at may be different from the one you receive from a credit inquiry. However, this is completely normal and is due to the fact that, as a consumer, you don’t have just one credit score. Rather, each credit bureau uses a different credit score model. For instance, the Equifax credit score is based on the FICO Score 8 using Equifax data, but it’s not the same as the true FICO Score. Conversely, TransUnion uses the VantageScore 3.0 model. In addition, Borrowell and Credit Karma provide their own credit scores, so you may notice differences between those, as well.
It’s also worth noting that not all lenders and creditors report to Canada’s credit bureaus. Likewise, the information provided may not be the same across the board, and some discrepancies could simply be caused by errors in your credit report. Yet, despite the differences, all credit score results are used to assess the same thing: How likely you are to pay your bills on time.
How to Get a Credit Score Check & Credit Report
Canada’s credit bureaus are required by law to provide you with a free credit report. Equifax calls it “credit file disclosure,” while TransUnion calls it a “consumer disclosure.” You can order your credit report by mail, phone or in person using the submission guidelines listed on the organizations’ respective websites.
You can also check your credit score and report online with both agencies. Equifax provides this information free of charge to all Canadians now, while credit data from TransUnion is available as part of their subscription-based credit monitoring service, priced at $19.95/month plus tax (according to recent legislation, Quebecers are exempt from paying this fee).
Apart from reaching out to Equifax and TransUnion directly, there are also several other tools and apps you can use to check your credit score and report: Borrowell and Mogo can be used to get your Equifax credit score, and Credit Karma can be used for your TransUnion score. These tools allow you to check your credit report and score for free.
Given that Equifax and TransUnion have different information about you in their files, it’s recommended that you request one from each bureau alternately, once every six months. This will provide you with a better assessment of your financial history, as well as prevent any surprises if your lender is using a report from a different agency.
Does checking your credit score lower it?
One of the reasons Canadians don’t check their credit score too often is because they believe that checking your score will lower it. Admittedly, this is true — to an extent. So, to better understand the effect of an inquiry on your credit score, let’s take a look at the two different types of credit checks: Soft inquiries versus hard inquiries.
Soft credit checks
A soft credit check is a credit inquiry made by you — as a consumer — or by a company as part of your background check. Soft inquiries can occur when you download your credit report, when you apply for insurance or when your employer asks for permission to check your credit. They also occur when you apply for preapproval on a loan or a credit card. And, although soft inquiries will appear on your credit report, they do not affect your credit score.
Hard credit checks
Hard credit checks — or hard inquiries — occur when a financial institution needs to check your credit to either approve or deny a loan. Whether you’re applying for a credit card or a mortgage loan, the lender will ask your permission to run this check.
However, unlike soft inquiries, hard credit checks do lower your credit score — both FICO and VantageScore models use them to determine whether you’re a risky borrower. Plus, if you have too many hard inquiries in a short timeframe, that could also indicate financial stress, which can put lenders off.
Hard inquiries will also lower your score by several points, which can be problematic if you have a short credit history and few credit accounts — in which case, every point matters. They also remain on your credit report for a long time, usually up to two years. As a result, experts recommend that you space out your hard inquiries several months apart.
How to Improve Your Credit Score
Credit scores are not set in stone and, depending on how well you manage your finances, you can either lose or earn points that will reflect on your overall score.
The first step to improving your credit score is understanding what it means. Now, you have a better idea of how your score is calculated, what lenders consider a good score, and also why credit scores are important. Using that knowledge, you can start taking active steps toward making it look better.
Stay on top of payments
The main factor that deducts points from your credit score is a history of late payments, which can remain on your credit report for at least seven years. Also, note that your payment history is the first thing lenders look at to determine whether you’re a risky customer. Therefore, aim to pay your bills on time or even before the due date.
Keep a low balance
All credit scoring models take your credit utilization ratio into account. So, a good rule of thumb is to pay down revolving account balances and aim for a credit utilization of 30% or less.
Avoid too many new credit requests
Each new credit request is considered a hard inquiry, which can snatch several points off your credit score, as well as reduce the average age of your accounts. In this case, try to limit the number of times you apply for credit and only apply when needed.
Build a long credit history
Lenders prefer a long credit history, which indicates that you have more experience using credit. To that end, keep your old accounts and cards open, and use them for small, regular payments.
Check your accounts regularly
Sometimes, a low credit score can be the result of something as unexpected as identity theft. To prevent this, make a habit of checking your credit report for any unusual activity and use credit-monitoring services to stay on top of your file.
Now you know the ins and outs of Canadian credit scores. Don’t forget to keep an eye on your credit score and try your best to improve it over time. In the end, it doesn’t only set the ground for your financial undertakings, but it’s also important when making bigger life decisions, such as changing jobs or moving to a new place, be it a rental or your new dream home.
We’d like to acknowledge the Government of Canada, Borrowell, Credit Karma, Experian, FICO, Investopedia, TransUnion, and VantageScore. Without their public resources, we wouldn’t have been able to put together this comprehensive credit scores guide for our Canadian readers.
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