Understanding your credit score
Being in debt can affect every part of your life, however, one of the main factors it can impact is your credit score.
Your credit score is a sign of your credit worthiness and can influence how much credit you’re able to borrow. You can access your score, often for free, as well as view your entire credit history as part of consumer credit reports.
Yet despite being an important part of managing everyday finances and financial well being, many people don’t understand what their credit score is or what it means.
In this guide we explain what your credit score is, why it’s important as well as factors that can influence it both positively and negatively.
What is your credit score?
Your credit score is a three digit number calculated using entries to your credit report by third parties. It demonstrates to potential lenders how reliable you are at repaying money you’ve borrowed.
Major credit bureaus and lenders don’t reveal the actual formulas they use to calculate credit scores, but we do know that it’s affected by your actions.
Put simply, you get points for positive information uploaded to your report like regular payments and lose points for negative information, such as exceeding a credit limit, that shows you’ve struggled to manage credit.
Other factors that may affect your credit score, include:
- how long you’ve had credit
- how long each credit has been in your report
- if you carry a balance on your credit cards
- if your debts have been sent to a collection agency
- any record of insolvency or bankruptcy
Your credit score ranges from 300 to 900. While credit bureaus will have their own scoring models, generally speaking the higher your score, the better your chances of securing credit at a low or zero interest rate.
What is your credit report?
Your credit report is a summary of your credit history.
It’s a record of everything you have borrowed ranging from credit cards to mortgages, personal loans and buy now, pay later schemes. Cell phone and internet accounts may also be included in your credit report, despite not being credit accounts.
Every time you access a new credit line it will be added to your credit report. The report will also include information such as:
- When you opened the account
- How much you owe
- Any missed payments
- Late payments
- Whether you exceed your credit limit
Why is your credit score important?
Lenders will review your credit report and your credit score to determine whether you’re a credit risk or not.
The better your credit score, the more choices you’ll have when it comes to applying to credit card companies or for personal loans. If you have a good credit score or an excellent score you’re also more likely to be offered a more competitive interest rate as well as higher credit limit.
How high should your credit score be?
In Canada your credit score will range between 300 and 900.
According to the Government of Canada, the average credit score ranges from between 650 and 725.
Regardless of your financial situation, it’s important to keep a close eye on your score to ensure you can improve your credit score if it dips.
What’s a good credit score?
A good credit score will depend on the scoring model used. However, Equifax states that a good credit score is typically between 660 and 724.
A score between 725 and 759 is considered to be very good, while a credit score of 760 and above is considered to be an excellent score.
What’s a poor credit score?
Again this will depend on the scoring model used but a poor credit to fair credit score usually ranges from 560 to 659 according to Equifax.
What should you look for on your credit report?
Regularly monitoring your credit report is important – especially if your goal is to improve your credit score.
As already mentioned, your credit report provides a snapshot of how you manage credit- including the good, the bad and the ugly – to allow lenders to assess whether to grant you credit in the future.
As it’s an important document that can directly impact your borrowing power, you should make sure you take time to review its contents and flag any errors as soon as possible.
Here are a few things to look out for on your credit report:
Errors
You should flag any debts or missed payments you don’t believe are yours with the agency holding the information.
Missing or incorrect information
Make sure to check personal information such as date of birth, contact details, employment status and social security number, are correct. You should also highlight open accounts that you believe you have closed.
Debts that have already been settled
It can take credit bureaus time to update your credit report, so it’s important to ensure they’ve updated your credit report with any cleared debts before applying for more credit.
Where can you check your credit score?
There are three main credit bureaus in Canada – Equifax, Experian and TransUnion.
Lenders will review your credit report and your credit score to determine whether you’re a credit risk or not.
These organizations offer you the most reliable way to regularly check your credit score, credit report and any changes.
Some credit bureaus may charge you for an online credit check, often in a monthly subscription, but you can order a free copy of your credit report from both Equifax and TransUnion. You can order by mail, fax or over the phone. This won’t have an impact on your credit score.
What impacts your credit score?
There are several factors that can impact
your credit score.
Payment history
Your payment history plays an important
part in calculating your credit score whether you’re making on time payments or
late payments. If you carry balances, like on a credit card account, each month
this will also impact your score.
Credit utilization rate
Your credit utilization rate, sometimes
known as your credit utilization ratio, is the amount of credit you’re using
divided by the total amount of revolving credit you have. In simple terms it
means potential lenders will view you negatively if you’re close to your limit
of your available credit.
Credit history
The length of time a debt has been on
your credit report can have an impact on your credit score.
Lenders will want to see that you have a
good credit history of being able to pay what you owe. If all the debts are
recent, there is no way to check the length of credit history and that you can
pay off your debts in the long term,
Inquiry number
It’s best to avoid making multiple credit
applications, or credit checks, over a short period of time.
This can make you seem like a greater
credit risk and reduce your score.
Credit diversity
The types of credit and public reports
(such as insolvencies and bankruptcies) can impact your credit score.
While public records can have a negative
impact, having a good mix of types of credit, including long-term loans and
revolving credit like credit cards can positively affect your credit score.
How does a Consumer Proposal or bankruptcy affect your credit score?
If you’re struggling to manage problem debt, you may consider a consumer proposal or bankruptcy.
While both can offer advantages and help you regain control of your finances in the long term, it’s important to be aware both can have a negative impact on your credit score for a period of time. However, if you’ve already have a poor payment history or have defaulted on debt your score will already be negatively affected.
Both TransUnion and Equifax state that a consumer proposal will be removed from your credit report the earlier of, three years after your consumer proposal is completed, withdrawn or annulled, or six years after it was filed.
That means the quicker you repay your consumer proposal the sooner you can begin to repair your credit score.
Rules for bankruptcies are slightly different.
Typically, both Equifax and TransUnion remove a bankruptcy from your credit report six years after the date you’re discharged. However, In Ontario, TransUnion removes a bankruptcy from your credit report seven years after you’re discharged. If you declare bankruptcy more than once, the bankruptcies will appear in your credit report for 14 years after your discharge.
How to improve your credit score
While you may not think about it, your credit score factors into your daily life. It is your ticket to financial freedom and provides security not only for yourself but your family. Being in debt will feature heavily on your credit report but you can gradually improve your credit score.
Have a good payment history
One of the easiest and most important ways to improve your credit score is to prove you’re not a credit risk. You can do that by staying on top of your payment history.
- To improve your payment history you should:
- Pay on time
- Make at least the minimum payment
- Contact lenders as soon as possible if you’re unable to pay
- Don’t miss a bill even if it’s in dispute
Maintain low credit utilization
Credit utilization is the percentage of your credit limit you actually use. Keeping the percentage low reassures lenders that your borrowing is under control and manageable.
Increase the length of credit history
The longer you have credit accounts open and in use, the better it is for your score. Your credit score may be negatively affected if all credit accounts are relatively new. Even if you transfer an older account to a new account, the new account will be considered as new credit. It’s worth considering keeping an older account open and using it from time to time to keep it open as long as there’s no charge.
Where can I get help improving my credit score?
If you’re struggling with a low credit score and are looking for support, A. Fisher & Associates can help.
As Licensed Insolvency Trustees we’re licensed and regulated by the Government of Canada.
We offer a no-obligation, free initial consultation to explain the options to eliminate your debt, including consumer proposals and personal bankruptcy.
Find out more and check if you qualify by clicking here.