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

Your credit file is based on the following elements:

• Payment history
• Credit utilization
• Adverse Notices
• Age of credit
• 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.

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.

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.

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.

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.

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.

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)

A good credit score helps you obtain credit, such as mortgages, car loans and credit cards. What’s more, 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: