Looking for an auto loan? Maybe you want to take out a mortgage? Maybe you want to get a new credit card?
In all cases, you will need to ensure that you have a good credit rating. What is a good credit rating in Canada? We’ll take a look at what a credit score is, how it’s calculated, and steps you can take to improve it.
What is a credit score?
A credit rating is a calculation of your creditworthiness based on several criteria. You can obtain a credit rating from two major credit bureaus, Equifax and Transunion in Canada.
A credit score can be used in the following situations:
- Car Loan Application
- Real estate loan application
- Rent an apartment or a house
- Apply for a job
- Apply for a credit card
- Apply for a line of credit
- Application for a personal loan
How is a credit score calculated?
Your dossier de crédit is based on six categories. Each of these categories has its own level of impact on your credit score:
- Open Accounts – This category is for the number of accounts you currently have open. To obtain a good credit rating, you must have at least 11 open accounts. Open accounts have a small impact on your credit history.
- Payment History – The payment history shows how often you pay your bills on time. You will need to pay at least 98% of your bills on time to get a good credit rating. Payment history has a significant impact on your credit rating.
- Adverse Notices – Adverse notices include items such as sending your debt to collections and other past due notices. To get a good credit rating, you must not have an adverse review. This has a significant impact on your credit rating.
- Age of Credit – The age of credit indicates how long your accounts have been open. To get a good credit rating, you must have your credit accounts open for at least seven years. Age of credit has a moderate impact on your credit score.
- Credit Utilization – Credit utilization shows how much of your credit you are currently using. To get a good credit rating, you must use less than 20% of your total credit. Credit utilization has a significant impact on your credit score.
- Full inquiries – Full inquiries represent the number of times a lender looks at your credit score when you apply for a loan, credit card or line of credit. To have a good credit rating, you must have less than two complete inquiries in a 12-month period. Surveys have a small impact on your credit rating.
What are credit tiers?
In Canada, your credit score can range from 350 to 900. The higher the credit score, the better. These credit ratings are divided into several levels. You will sometimes hear terms like “Level 1 credit” or “Level 4 credit”. Here is what these terms mean.
- Level 1 – Level 1 is assigned to scores of 800 and above. This is an exceptional credit. With Tier 1 credit, you can get the best interest rates, the highest credit limits and special rates that beat the market.
- Level 2 – Level 2 credit is considered excellent credit. To be in the Tier 2 credit category, you must have a credit score between 740 and 799. With Level 2 credit, you can get competitive rates on loans, lines of credit and high credit limits.
- Level 3 – Level 3 credit is considered good credit. To be in credit category 3, you must have a credit score between 670 and 739. With Level 3 credit, you should be able to get good interest rates and credit limits. Also, apartment, mortgage and car lenders like to see people with Level 3 credit.
- Tier 4 – Tier 4 credit is considered correct. Tier 4 ratings range from 580 to 669. With Level 4 credit, you should be able to obtain auto loans and mortgages. However, you may not get the best rates. You can also get an apartment rental with a Level 4 credit. However, some luxury apartment renters may want to see at least a level 3 credit.
- Level 5 – Level 5 credit is considered poor. To be in the Tier 5 category, your credit score must be below 580. Most lenders do not approve people with Level 5 credit.
Getting a car loan
If you want to get a car loan, you must have at least a Level 4 credit. If you want to get good interest rates on your loan, you must have 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.
Getting a rental
You must have at least a level 3 credit if you want to rent a luxury apartment or a high-end house. For an average apartment, you will need at least a level 4 credit. Some landlords may approve people with Level 5 credit if they offer a double bond.
Obtaining a real estate loan
To get a home loan, you must have at least a Level 3 credit. With a Level 4 credit, you can get a home loan. However, you may have to make a larger down payment and pay a higher interest rate.
You are unlikely to get a home loan with a Level 5 credit.
Getting a credit card
To obtain a credit card, you must have a minimum of Level 4 credit. If you want higher limits, you will need to be in a high credit group. If you are in credit category 5, you can get a secured credit card.
A secured credit card requires you to put up collateral for the amount of your credit.
How to maintain a good credit rating
You need to keep your credit rating as high as possible. Here are some simple steps you can take to maintain a good credit rating.
- Pay your bills on time
- Keep your credit utilization below 20%.
- Don’t ask for credit too often
- Monitor your dossier de crédit
Know your credit rating in Canada
A good credit account can open the door to everything from home loans to high credit card limits.
Make sure you know your credit rating and make sure you are in the highest credit bracket possible. Soon you will have a credit rating that will allow you to easily access the loans and credit you need.