Andrew Goldman has been writing for over 20 years and investing for the past 10 years. He currently writes about personal finance and investing for Wealthsimple. Andrew's past work has been published in The New York Times Magazine, Bloomberg Businessweek, New York Magazine and Wired. Television appearances include NBC's Today show as well as Fox News. Andrew holds a Bachelor of Arts (English) from the University of Texas. He and his wife Robin live in Westport, Connecticut with their two boys and a Bedlington terrier. In his spare time, he hosts “The Originals" podcast.
Credit scores are a lot like your teeth. You get them for life, you have to take some basic steps to take care of them, and should anything catastrophic happen to them, you’ll find yourself in a very unhappy place. But unlike choppers, where, if they all fall out and you really want to chew some jerky, you can go out and buy a new set, credit scores are exceedingly difficult to fix once you’ve ruined them.
What Are Credit Scores Exactly?
A credit score, also referred to as a FICO or Beacon score, or is a number that corresponds to any Canadian like yourself who’s ever made any kind of transaction using credit. Anytime you seek further credit, this number will be readily available to any potential creditor to provide an easily digestible three digit snapshot of how likely you are to pay your creditors on time, or for that matter, pay them at all. So in other words, if you don’t have the cash on hand to pay for a house, a car, or rent for the entire term of a lease, this number will be invaluable to your ability to navigate the world as an adult. Debt may sound like a dirty word, but pretty much everyone in the developed world depends on it.
Canadian credit scores range will range from 300 to 900, and the higher the number, the better.Wealthsimple offers an automated way to grow your money like the world's most sophisticated investors. Get started and we'll build you a personalized investment portfolio in a matter of minutes.
Who compiles credit scores?
Credit scores are compiled by both of the major credit reporting agencies here in Canada, TransUnion and Equifax, so it’s very likely that you’ll have two scores that are close, but not identical. The agencies are both pretty open about the factors that go into computing your credit score, but, like the keepers of the Coca-Cola recipe, they’re super secretive about exactly how they arrive at the number. Before we get to the actual numbers, we’ll first go over the factors that will move your credit in the right or wrong direction.
What factors affect credit scores?
Equifax provides a fairly thorough breakdown of the factors that affect credit scores, a list we suggest all expectant mothers read to their children while in utero in order to start preparing them for life on earth and in debt.
Payment history. The one’s straightforward. Did you pay on time every month? Good for you, if you did. If you paid late, exactly how late? Did you miss a payment. Did you miss nine payments? This goes for mortgages, car payments, credit and department store cards, and pretty much anything else that involved someone fronting money for you. Credit agencies will take into account the percentage of accounts you’ve opened and kept in good standing versus those that had repayment problems.
Used credit versus available credit. Credit card companies like folks who have a lot of credit but aren’t maxed out. TransUnion specifically says your score can be adversely affected if you carry debts of more than 50% of your credit limit. Ironically, your credit scores may actually be better if every month you make just the minimum payment on your cards, a practice that CNBC recently pointed out is an incredibly bad idea for you. Paying the minimum, however, makes you a very attractive customer to creditors since they stand to make a great deal of money from you. Only people with brains made of oatmeal would endeavor to improve their credit scores by every month paying only the minimum amount due on credit cards. It’s valuable to remember that credit reporting agencies are not motivated by what’s best for you but are in fact funded by the credit card industry.
Types of credit. The agencies love to see that you’ve got a nice mix of credit. If credit were a wine, they’d prefer a meritage of several grapes over a pure Cabernet. Someone whose credit is mixed between a mortgage, a car loan, and student loans will likely have a higher credit score than a person with a similar amount of debt in just one of those categories.
New credit. Get a new credit card or car loan recently? This will affect your credit score, but it’s a little tricky if it will affect it for the better or worse. If a card improves your credit utilization rating, that is, shows that you have more available versus used credit, your score would likely improve. But generally, the agencies are wary of customers who seem to be forever looking for new sources of credit to prop up their lifestyles.
Recent inquiries. Nobody likes to get hectored with questions all the time, and this especially applies to credit reporting agencies. Every time you apply for a new line of credit, this will count as a “hard inquiry” to your credit. To protect your score, keep these hard inquiries to a minimum.
Other factors include: Job and address stability, debt that moves around from one account to another. Then there’s lack of debt, which though it might seem like good news for a consumer, makes you less appealing to lenders.
What’s a good credit score in Canada?
Numbers matter. Not only will a lousy credit score affect your ability to get more credit, it may also prevent you from being approved for an apartment or being approved to rent a car. Canadian law even allows prospective employers to seek permission to check your credit.
Here are the hard numbers:
|Excellent. If Greenland were actually for sale, the banks might provide you the credit to buy it. Seriously, if you approach a creditor with any reasonable request, your application will likely be expedited without you having to provide any further documentation. Also, because you are considered a very low-risk borrower, you will pay the lowest interest rates currently available.
|Very Good. While you’ll still likely to be approved for a loan without too many headaches, your interest rate will be a hair higher than a borrower with an 800+ score. Generally, you’re still sitting pretty.
|Good. You’ll still be able to get credit, but depending on where your score falls in this range, obtaining it will be a little more expensive, and certain products, like low-interest credit cards, may turn up their noses and deny you in favor of those with higher FICOs.
|Fair. If you are in this range, you may notice bank tellers avoid eye contact and strictly enforcing the one-lollipop-per-customer rule. Any potential lender will be asking for lots of backup materials, and perhaps even a cosigner, before they agree to lend you money. If they approve you, you will pay among the highest interest rates on the market.
|Poor. You will have a very difficult time being approved for any loan. Remedies for this predicament are outlined below.
How can I get my credit scores?
Though both Equifax and TransUnion would love nothing more than selling you one of their fancy credit reporting subscriptions, if you search a little more on their websites, you’ll discover that they’ll also provide you credit reports for free. Within these credit reports you’ll be able to find all the information that went into computing your credit score. Here you’ll find directions to get your Equifax report, and over here find instructions for obtaining your TransUnion report. Because they aren’t required to, neither agency will turn over your actual credit score for free. Equifax and TransUnion will charge you just shy of $25.00 to access your score.
How to improve your credit scores.
If your credit scores are stuck in the basement and are hindering you from buying a house, a car, or getting a credit card, there are several things you can do to nudge them in the right direction, though just as it probably took you a significant period of time to damage your credit, you also won’t be able to fix it overnight.
Dispute any credit reporting errors. Everybody makes mistakes, and now that identity thefts are about as common as flies in a cow pasture, it’s possible that one of those mistakes has made it into your credit reports and is adversely affecting your credit score. Both agencies have official procedures in place to dispute items in your report.
Pay your debt. That’s a no brainer, right? Well, even if you have huge unpaid credit card debts, negotiating a workable payment plan with your credit card company can go a long way to rehabilitating your credit score. Remember: always pay your highest interest credit card debts first.
Clear up any collection agency debts. Once you have, they’ll stop adversely affecting your score in about three years’ time.
Become punctual on all payments. Though it might seem insignificant, even making regular, on-time payments to your cell phone provider, for example, can slowly inch your score up.
Establish responsible habits with a secured credit card. Sure, you might not qualify for any more credit cards, but if you have a secured card—meaning, you can only spend what you’ve deposited into the account—the agencies will take notice that you’ve turned over a new leaf.
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