How is Your Credit Score Calculated in Canada (2022)?

Have you ever wondered what a credit score of 680 means for you when you need a mortgage or a loan? 

You know that your credit score affects your ability to borrow money, and it affects the mortgage amount you can qualify for. 

And, logically this makes sense. Why would a lender loan you money if your credit score is poor?  In order to find out how creditworthy you are, lenders pull your credit report from one of the two huge credit bureaus in Canada – Equifax or TransUnion.

According to Borrowell, their average Canadian member has a credit score of 667.  So you may very well be in good standing without even knowing it. 

At the end of this article, you will have a better idea of how your credit score is calculated in Canada.

And, since you’re a friend of the blog, you’ll even get some tips to help you improve your credit score! 

Not bad, huh?  Keep reading.

What is Included in Your Credit Report?

Before getting into the numbers, it is important to know what is included in your credit report.  Here are some of the most important details according to the Financial Consumer Agency Canada:

Personal

  • Name
  • Address
  • Telephone number(s)
  • Social Insurance Number (SIN)
  • Driver’s license number
  • Previous employers and job titles

Financial

  • Credit usage
  • Collection agency debt
  • Bankruptcy decisions
  • Date that you opened your credit line (credit cards, loan, line of credits)
  • Missed payments
  • Amounts owing

And, yes, if you miss your bill deadlines all the time, then it will affect your credit score. 

How Long Does Information Stay on Your Credit Report?

You probably don’t have a problem with good credit events staying on your credit report forever.  However, with negative events, you want to know how long they will stay on your credit report before falling off, right? 

According to Equifax Canada, most of the negative data (collections, late payments etc.) shows up on your report for six years.  If you declare bankruptcy, then it stays on your record for seven years.

Credit Scores

Many people figure their credit scores are stellar without knowing if it’s true or not.  If you haven’t looked at your credit report recently, do so before you go house hunting just in case there are errors or mistakes. 

It is possible that you forgot about a time 10 years ago when one of your accounts entered collection.  Get that situation resolved before placing an offer on a house.

While it’s nice to know what your credit score is by pulling a report yourself, the only credit score that matters is the one a mortgage professional receives via Equifax or TransUnion.  That score is known as a “beacon score”.  

Lenders look at your “beacon” score and determine whether you are creditworthy. Remember, the lender is thinking about loaning you hundreds of thousands of dollars. Checking your credit score is the logical thing to do to assess your ability to pay back debt.  

The range for credit scores is 300 to 900 in Canada.  A score of 900 is the maximum (best).  A score of 300 is the minimum (worst). 

The two large credit bureaus in Canada (TransUnion and Equifax)  have different scoring models, but no matter which company is doing the rating the same principle holds – the higher your credit score, the better your credit rating is. 

According to Equifax, a credit score of 760 and above is considered “excellent”, scores between 725 and 759 are considered “very good” and any score between 660 to 724 is labelled as “good”. 

As long as your credit score is at least 660 you will be considered a low-risk borrower and you will have access to better interest rates.

Starting on July 1, 2020, the minimum credit score required for at least one borrower on an insured mortgage was set to 680. 

Borrowers with lower credit scores cannot carry as much debt.  A score under 560 is considered “poor” using the Equifax ratings. 

If you don’t have enough credit history, then it is too difficult for a lender to assess your creditworthiness.  This is called “thin credit” and it trumps your credit score.  If you don’t have an “active” history, then lenders won’t consider your credit score.  

The normal requirement is to have two active trade lines, such as a credit card and a loan.  A trade line is active if the credit limit is $1,000 or more and the line has been in use for at least one year. 

How is Your Credit Score Calculated?

Once again, credit scores are important because lenders look at them to determine whether you are a good candidate to make payments on a mortgage or loan. 

There are five main factors that affect your credit score.  The percentages below follow the guidelines from Loans Canada

Credit score factors

35% – Your Payment History

The largest factor in determining your credit score is your ability to pay your debts on time.  This makes sense from a lender’s perspective.  If anyone wants to determine your creditworthiness, there’s no better way than to look at how you have managed your prior debt repayments.

Any late payments or collections processes you’ve gone through will show up.  Late payment frequency and the amount of time your loans or bills are overdue are also factors that are considered.

By far the biggest way to improve your credit score is to pay your bills on time. 

Whether it’s a car loan, a bill, a line of credit or making your minimum credit card payments, just pay it on time. 

Not a moment later than the due date. 

This is one category with a Cinderella deadline.

If the deadline to pay your credit card is midnight on March 5th, make sure you pay by March 5th

Keep it simple.

The easiest way to pay your debts on time is to set up automatic bill payments. 

30% – How Much You Owe / Credit Utilization

Outside of your mortgage, keep your debt levels low.  If you have $50,000 sitting on a line of credit that you’re using all the time, it will affect your credit file.

More relevant for Canadians, make sure that your utilization of your credit cards is low.  In an ideal world, you always want to pay your credit card balance off.  Even if you can only make the minimum payments, try to keep the balance on your credit card to 25% or less. 

If your credit card balance is $3,000 and you have a $2,400 outstanding balance on it each month, that means that you are carrying 80% of your credit card’s total limit as a balance.

Frown. 

Try to keep the balance to $750 or below in this scenario. 

Think of it this way.  Imagine your friend came to you and asked for $2,000. What would you do? 

You may be unsure about your friend’s ability to pay the money back, so you ask your friend to show you their credit card statements. 

If you saw your friend had a credit balance of $4,500 every month on their credit card, which has a limit of $5,000, how would you feel?

You would probably be very hesitant to lend your friend the money after learning that they already owe such an exorbitant amount of money on a normal basis, right?

Right.

That’s exactly how a lender would feel about you if you asked them for $500,000 and you consistently had a high credit card balance owing, even if you make your minimum monthly credit card payments. 

15% – Credit History

Believe it or not, the time you have had access to a credit account matters. Some say to keep a ten-year-old credit card open because that establishes a longer active credit history as opposed to cancelling it and opting for a new credit card.

You also need to access your credit account every so often, even if you only put minimal amounts on the card. 

Lenders like to see that you use your credit and then pay it off.  If you never use your credit card, lenders don’t know if you have the ability to pay off the balance. 

10% – Public Records

If you had any prior issues with bankruptcies or collections, lenders will consider you high risk.   Bankruptcy will affect your credit score negatively. 

10% – Inquiries

When you apply for another credit card, it gets recorded as an inquiry on your file.  In most situations, too many of these inquiries in a short time will adversely affect your credit score. 

When you’re looking for new credit sources, whether it is a personal loan, car loan, or credit card, it is known as a “hard” check.  

When you pull yourself a copy of your credit history it is known as a “soft” check which does not affect your credit score. 

There are a few situations where making credit inquiries in quick succession won’t affect your credit score and they revolve around comparison shopping for mortgages or car loans. 

According to Equifax, you have a 14-45 day range to do all your comparisons before they affect your credit score.  If you go to Bank A, Bank B and Bank C for a mortgage application, they will group all three requests into one as long as the mortgage checks occur within the timeframe above. 

Stay away from habitually opening new credit accounts and don’t sweat the credit checks unless you’re someone who is trying to buy a new cellphone every day.

Avoid credit card “hacking” to receive promotions on credit cards.  Don’t go opening half a dozen credit card accounts to save $50 or get 2% cashback for six months. 

If you always pay your credit card balance every month, this is a decent strategy, but for anyone else, don’t bother. 

Tips to Improve Your Credit Score

So how do you find your way into the 680+ credit score crew?  Just follow the list below.

  • Pay your bills on time
  • Remove any collection balances you have (pay down debt and report the payment(s) to Equifax and TransUnion)
  • Avoid bankruptcy
  • Review and monitor your credit score (either free or paid) – look for erroneous charges
  • Hold only 2 to 3 credit cards at most and keep the balances either paid off or low
  • Limit credit inquiries (cars, cellphones)

You don’t need to keep a credit card open for as long as possible, even if you don’t use it anymore.  The main things are to make payments on time and have at least two lines of credit open.  These tips should help you achieve an above-average credit score.

Credit Score Conclusion

You need to have a good credit score to get your mortgage approved and gain access to better rates. So follow the tips above, but most of all pay your bills on time. Use automated bill payments if you need to do that.

How do you handle your bill and credit card payments? Let us know in the comment section below.

Credit Score FAQs

How is credit rating determined in Canada?

Your credit score is determined by five factors in Canada. The factors are your: payment history, credit utilization, credit history, public records and inquiries.  

What are 3 ways to boost your credit score?

Three tips for improving your credit score are:  paying your bills on time, removing any collection balances you have and keeping your credit card balances fully paid off or almost paid off. 

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