What Is a Good Credit Score in Canada?

What Is a Credit Score?

A credit score is a means by which banks, financial institutions and other lenders evaluate your ability to repay your debts. A low credit score indicates that you are less likely to repay your loan on time. Conversely, a good credit score indicates that you have the ability to repay your current and future debts.

In other words, it evaluates the risk level of borrowers. The higher your credit score, the greater your chances of obtaining a loan. In Canada, your credit score is calculated by the Equifax and TransUnion credit bureaus.

Your credit score is generally used in the following situations:

• Car loan application
• Mortgage loan application
• Rent an apartment or a house
• Apply for a job
• Credit card application
• Apply for a line of credit (e.g. personal line of credit)
• Apply for a personal loan
• Insurance application

How Is the Credit Score Calculated?

Your credit file is based on the following elements:

• Payment history
• Credit utilization
• Adverse Notices
• Credit History
• Number of Accounts
• Full Inquiries

Each of these elements has its own level of impact on your credit score. For example, payment history, which represents your ability to pay bills on time, accounts for 35% of your credit score.

Here’s more information on each of these elements.

Payment history

Payment history shows how often you pay your bills on time. To maintain a good credit score, you need to pay your bills on time. In fact, a single missing payment will impact your credit score and remain on your credit report for up to 6 years. So make sure you meet your monthly payment due dates. Your repayment habits have a major impact (around 35%) on your credit score.

Credit utilization

Credit utilization shows how much of your credit you are currently using. It’s the balance owing in relation to the available credit limit for all your credit lines. To obtain a good credit score, you must have a utilization ratio of less than 30%. Credit utilization has a significant impact (around 30%) on your credit score.

Adverse Notices

Adverse reviews include items such as sending your debt to collections and other past-due notices. To obtain a good credit score, you must not have any adverse reviews. This has a significant impact on your credit score.

Credit History

Your credit history indicates how long your accounts have been open. For a good credit score, you should have had your credit lines open for as long as possible (15 years or more). Age of credit has an average impact (about 15%) on your credit score.

Number of Accounts

Number of open or closed credit card accounts, loans, mortgages, etc. To get a good credit score, you need to have at least 11 open accounts. Varying the type of credit is also a good idea. The number of accounts has a small impact (about 10%) on your credit score.

Full Inquiries

Hard hits are the number of times a lender checks your credit score when you apply for a loan, credit card or line of credit. For each inquiry, a note is recorded on your credit file. To have a good credit score, you must have less than two full inquiries in a 12-month period. Inquiries have a small impact (about 10%) on your credit score.

What Are Credit Tiers?

In Canada, your credit score can range from 350 to 900. The higher the credit score, the better. A good credit score varies slightly between Equifax and TransUnion, but is generally a rating of 700. In addition, credit scores are divided into several levels:

• Level 1 – This is exceptional credit, usually assigned to a credit score of 800 or more. With Level 1 credit, you can obtain the best interest rates and higher credit limits.
• Level 2 – This is excellent credit, requiring a credit score between 740 and 799. With Level 2 credit, you can get competitive rates on loans and high credit limits.
• Level 3 – This is good credit, requiring a credit score between 670 and 739. With Level 3 credit, you should be able to obtain good interest rates and credit limits. Many banks and lenders require Level 3 credit, but this is not always the case.
• Level 4 – This is considered fair credit, with a credit score between 580 and 669. With Level 4 credit, you’ll be able to get a mortgage or car loan, but probably not at the best rate. You can also rent an apartment, although landlords often require level 3 credit.
• Level 5 – This is bad credit, with a credit score below 580. Most lenders do not approve people with Level 5 credit.

Why Is a Good Credit Score Important?

As you may have guessed, having a good credit score is an important factor when it comes to obtaining new credit: car loan, mortgage, new credit card, apartment rental, etc.

Getting a Car Loan

If you wish to obtain a car loan, you must have at least Level 4 credit. If you want to get good interest rates on your loan, you need at least a Level 2 credit. Some auto lenders will give you a loan with Level 5 credit. However, you will probably have to pay higher interest rates.

Renting an apartment

You need at least a level 3 credit if you want to rent a high-end apartment or house. For an average apartment, you’ll need at least level 4 credit. Some landlords may approve people with level 5 credit if they offer a double deposit.

Getting a mortgage

To obtain a mortgage, you must have at least Level 3 credit. With Level 4 credit, you can get a mortgage. However, you may have to make a larger down payment and pay a higher interest rate. You’re unlikely to get a mortgage with Level 5 credit.

Getting a credit card

To obtain a credit card, you must have at least level 4 credit. If you want higher limits, you’ll need to be in a high credit group. If you are in credit category 5, you can obtain a secured credit card. A secured credit card requires you to pledge collateral up to the amount of your credit.

How do you maintain a good credit score?

Of course, you need to keep your credit score as high as possible. Here are some tips for maintaining or improving your credit score:

• Meet your monthly payment deadlines
• Keep your credit utilization ratio below 30%.
• Pay frequently ahead of schedule
• Keep credit lines open as long as possible
• Pay off your debts (if any)
• Don’t ask for credit too often
• Don’t ask for superfluous cards
• Don’t apply for new credit cards before a mortgage appointment
• Monitor your credit file regularly
• Lock your credit file or add alerts for credit applications (to avoid fraudulent applications that could negatively impact your credit score)

Check and Know Your Credit Score

A good credit score helps you obtain credit, such as mortgages, car loans and credit cards. Plus, a good credit score means better rates and higher credit limits. However, you need to check your credit score to know what it is, and take steps to improve it if necessary. In fact, here are two guides to help you check your credit file with the Equifax and TransUnion credit bureaus:

Additionally, some banks allow you to check your credit score from their secure platforms or mobile applications.

Bottom Line

In short, credit score is an important factor when you want to obtain a car loan, rent an apartment, take out a mortgage or even take out a new credit card. A good credit score not only helps you obtain credit, but also gets you better rates and higher credit limits. So the higher your credit score, the better.

Frequently Asked Questions