Do Canadians Have Credit Scores? What You Need to Know
Demystify Canadian credit scores: learn how they function, what influences them, and practical ways to manage your financial standing.
Credit scores are a fundamental component of personal finance in Canada. These numerical representations summarize an individual’s financial behavior and creditworthiness. They serve as a tool for financial institutions to assess the risk associated with lending money or extending credit.
The Canadian Credit Score System
Credit scores are widely used by lenders across Canada to evaluate financial responsibility. The two major credit bureaus, Equifax Canada and TransUnion Canada, collect financial data and generate these scores. These bureaus gather information about an individual’s borrowing and repayment activities, compiling it into a credit report.
From this data, credit scores are calculated, typically ranging from 300 to 900. A higher score indicates a lower risk to lenders. Lenders use these scores to make decisions regarding loan approvals, interest rates, and credit limits, as they predict the likelihood of repayment.
How Credit Scores Are Determined
Canadian credit scores are calculated based on several key factors. Payment history holds the most significant weight, typically accounting for about 35% of the score. This factor reflects whether payments on credit accounts, such as credit cards, loans, and mortgages, are made on time and consistently. Late payments, especially those over 30 days past due, can negatively impact a score and may remain on a credit report for up to seven years.
The amount owed, also known as credit utilization, is another substantial factor, often contributing around 30% to the score. This measures the amount of available credit currently being used. Maintaining a low credit utilization ratio, ideally below 30% of the total available credit, is generally recommended to positively influence a score. For instance, if an individual has a total credit limit of $10,000, keeping outstanding balances under $3,000 would be beneficial.
The length of an individual’s credit history accounts for approximately 15% of the score. A longer history of responsible credit use provides more data for lenders to assess stability, generally resulting in a more favorable score. Newer credit accounts can lower the average age of an individual’s credit history, which might negatively impact the score.
New credit inquiries and the types of credit used each contribute roughly 10% to the overall score. Applying for too many new credit accounts in a short period can temporarily lower a score, as it may suggest an increased risk to lenders. A diverse mix of credit, including both revolving accounts like credit cards and installment loans such as mortgages or car loans, can demonstrate an ability to manage different forms of debt responsibly.
Obtaining Your Credit Information
It is important to differentiate between a credit score, a three-digit number summarizing credit risk, and a credit report, a detailed history of credit activities. Equifax Canada and TransUnion Canada offer ways to obtain this information. Individuals are entitled to a free copy of their credit report annually from each bureau. This can be requested online, by phone, or by mail. Identity verification is necessary for these requests.
Many Canadian banks and financial technology companies also offer free access to an individual’s credit score. While these services provide a convenient way to monitor one’s score, the score provided by a bank or third party may differ slightly from the official score calculated directly by the credit bureaus, as different scoring models can be utilized.
Strategies for Credit Management
To build or maintain a strong credit score, consistently make all payments on time. Payment history is the most significant factor influencing a score. Making minimum payments by the due date is better than missing a payment entirely.
Keeping credit utilization low is another strategy. Aim to use less than 30% of your available credit limit on revolving accounts. Paying down balances frequently helps maintain a low utilization ratio.
Maintain a long credit history by keeping older accounts open, even if not actively used. Avoid excessive applications for new credit within a short timeframe, as each application results in a hard inquiry that can temporarily lower a score. Regularly review credit reports from both Equifax and TransUnion for accuracy, as errors can negatively affect a score.