How much do you know about what makes up credit scores in Canada?

Table of Contents

Here at Canadian Budget, we believe in responsible credit use. Credit cards are not inherently bad! We need to learn how to use them responsibly; they can provide many benefits. They can give cash sign-up bonuses and cashback on purchases, or earn points for hotels, flights, and travel. What you need to know about credit scores in Canada is what makes up your score, so you can understand how to improve it if needed. We hope this article can help you utilize credit more effectively by understanding what makes up your credit score.

We all use credit so readily, and often don’t think twice about our credit scores, until it comes a time that we need to rely on it. When you are applying for a rental lease or a mortgage are one of the two most important times we need to rely on having a strong credit score.

Understand Your Credit Score

Your credit score is basically a report card on your credit usage & habits. It tells lenders how risky of a client you may be. What you need to know about credit scores is that they can really help or hurt you in your financial life.

Have low credit? You may pay higher interest rates on loans, credit cards, and mortgages.

What about really bad credit? You may not be approved for these things at all.

Whether we like it or not, the world revolves around credit. So you better understand how to make sure your credit score improves or stays high to give yourself better options. There are actions and habits you can put in place to improve credit scores in Canada.

What makes up your credit score in Canada?

Your credit score in Canada is calculated on a range from 300 – 900, 900 being perfect. Credit scores of 660 and above are generally considered good.

Your credit score is made up of five different components

Payment History
Credit Utilization Rate
Length of History
Account Mix
Inquiries

Let’s dive into each of these components for a deeper look at what they measure and how you can take steps to positively impact your score.

The first two make up 65% of your score, and are the most important.

Payment History

35% of your total credit score comes from your Payment History.

Have you paid your bills on time, always paid at least the minimum, and never missed a payment? Then you are probably scoring pretty well on this component.

Late to pay, carry a balance, or miss payments? That can really have a negative effect on this measurement of the score. Having trouble managing your money – here some ways to make a budget you can stick to.

Credit Utilization Rate

Credit utilization rate accounts for 30% of the overall score. What this is measuring is how much of your available credit are you actually using. Are you maxing out your credit card constantly or are you only using a small portion of the total available credit?

Many sources recommend utilizing no more than 30% of your credit at any given time. If you have a $1,000 limit card – stick to using $300 or less at a time. A $10,000 limit card, use under $3,000. This is a general guideline, but if you want to keep it from impacting your scores – keeping the credit utilization rate low is key.

If you consistently have high levels of credit utilization (eg. maxing out your cards), it makes you look risky to lenders.

Length of History

How long have your credit accounts been active? This component accounts for 15% of your credit score. The length of your history shows lenders your track record. If it is long and strong, they are more confident to lend to you. Keep your longest-held cards open as long as possible (especially if they are no-fee cards – just pay the balance off and put it away in your documents drawer.).

When you are thinking about closing out any cards you may no longer be using, consider the history of the account first.

Account Mix

Are you capable when it comes to handling multiple forms of credit? Have you successfully managed a car loan, plus student loans, and credit cards at the same time? This is only worth 10% of the score, so small potatoes compared with the first few.

All of these items come together to create and impact our credit scores in Canada.

Inquiries

Inquiries to credit scores in Canada are worth about 10% of the total overall score. Creditors make inquiries about your credit score any time you apply to open a line of credit, apply for a credit product, or have a credit check done. These hard checks, as they are called, do have a small impact on your score.

Any time you check your own credit – this does not have an impact on your score.

Know your credit score

If you don’t know wether or not you have a good credit rating in Canada, you should definitely check your credit score to find out. As with anything – unless you are measuring, you don’t know if you need to improve it, or how. Knowing what makes up your credit score in Canada, its time to figure out where you stand.

Checking your credit can also be a way to verify if you have been a victim of fraud or identity theft, as you would be able to see any accounts opened in your name.

There are two major credit agencies that serve Canadians, which are Equifax and Transunion. You can contact them directly to request your score report. Transunion offers a monthly “Credit monitoring plan” which is paid and allows you to check your score. I have found in the past it’s a bit hard to get your free report from them.

Free and Quick Ways to Check Credit Scores in Canada

Equifax

Equifax also offers a paid monitoring option – but they also now have a free score checking directly on their website which makes it much easier to check than it had been previously. It can help you understand your credit score.

Borrowell

Borrowell was the first company in Canada to allow Canadians to check their credit score for free! They also offer a free personalized credit monitoring tool. You can use their tools to help improve your financial well-being and understand your credit score. Sign up here to get your free credit score with Borrowell

If you are one of my American readers- its quite easy to get your free report – you can check here: https://www.annualcreditreport.com/

I hope this helps you understand what makes up your credit score, and why responsible credit use is so important!

New To Canada with No Credit History?

If you are a newcomer with no credit history in Canada it can seem daunting to know how to build your credit. A secured credit card might be a good option to consider.

A secured card uses your own security deposit as the credit limit. Neo Financial offers a secured credit card with no annual fees that can help you build your credit in Canada! You can start with as little as a $50 deposit, and no hard credit check is required to apply. Earn enormous bonuses — like 15% cashback — on your first purchase at most partners. In addition, you can earn an average of 5% cashback on your everyday spending as well!

You can use a secured card to build a strong credit score in Canada (or to rebuild your poor credit score) by implementing all the elements you learned in today’s post.

Understand what makes up your credit score in Canada
Always use less credit than your limit keeping your credit utilization rate low
Always pay your bills on time
Always pay the minimum
Don’t carry a balance

Responsible credit use

Using credit responsibly means living within your means, staying within your budget, not maxing out your cards, and paying your card off in full each month, never carrying a balance. These practices will help you maintain good credit scores, be able to live debt-free, and grow your wealth.

As exclusive credit card users ourselves, we know the amazing benefits of responsibly using credit! Understanding what makes up your credit score is the first step toward taking proactive steps to use credit responsibly.

About The Author

Jessica Morgan

Jessica Morgan is the founder and CEO of Canadianbudget.ca. She is passionate about personal finance and helping Canadians improve their financial literacy by providing more Canadian focused financial content. A millennial mom of one, she has a burning obsession with all things personal finance.
Jessica has a BA in East Asian Studies from York University and a Masters in Business Administration from Toronto Metropolitan University. She is a career public sector employee with a Hybrid Pension, and an advocate for Canadian women to improve their personal finance knowledge.

See author's posts

Credit scores in Canada – What you need to know