How Canadian Credit Scoring Works

Here’s a guest post from Ed O’Brien about Credit Scores- I don’t know too much about credit scores because I never really had to worry about them (since I’m an angel and always paid my credit card bills on time lol), so I was very interested to see how credit scoring works here in Canada. Though when I got my credit score when I applied for my mortgage, I was surprised I was only in the 780′s.  I think this is likely because I have some unused credit cards that are just lying around.  Time for some spring cleaning, I suppose!

Your credit score is a number that evaluates the information in your credit report. A good credit score would indicate that you’ve been responsible with your credit accounts and have paid on time. A bad credit score reveals the opposite, that you haven’t paid your accounts on time or that you’ve had to file bankruptcy to deal with your debt.

Credit scores in Canada are calculated and sold by two major credit bureaus: Equifax and TransUnion. The scores range from 300 to 900. Credit scores above 800 are the best, 760 to 799 is good, the low 700s are fair, and below 699 is a bad credit score. Lenders place a lot of importance on credit scores during the application process because statistics show that consumers with the best scores are the least likely to default on their credit cards and loans. On the other hand, delinquency rates are very high with borrowers with credit scores below 600.

What a Good Credit Score Means

Credit Score Pictures, Images and Photos

A good credit score put you in the best position to be approved for many credit cards and loans without having to go through a rigorous application process. Of course, mortgage and auto loan applications will be a more intense process even with a great credit score. Not only does a good credit score improve your chances at being approved, it also lets you get the best interest rates and terms on the loans you’re approved for. You may even have more access to instant approval loans and credit cards.

Things That Hurt Your Credit Score

There are things you do that will bring your credit score down and hurt your ability to get approved for new credit cards, loans, and other credit-based services. Here are a few things that hurt your credit score:

  • Having too many accounts. Unfortunately, we don’t know the specific number of accounts that hurts your credit score, so keep your accounts on an as-needed basis.
  • Having high account balances. Any credit card balance that’s above 35% of the credit limit is too high.
  • Too few accounts or recently used accounts. The same way having too many accounts hurts your credit score, having too few accounts also hurts your credit.
  • Loan balances too high compared to the original loan amount. The longer it takes you to pay off your loans from, including those from cash advance sources,  the more your credit score is affected.
  • Applying for too many credit cards or loans within the past 12 months. Requesting a copy of your own credit report or credit score does not hurt your credit.
  • Having a short credit history. A credit account that hasn’t been activated for very long since.

You have the power to get and maintain a good credit score by paying your bills on time every month – even utility bills and cell phone companies that don’t report positive payments, sometimes report late payments. Paying balances quickly will help your credit score since high loan and credit card balances negatively affect your credit score. Keep your new applications to a minimum. Apply only as needed.

Ordering Your Credit Score

Though you can order your credit report online or by mail, your credit score is only available for purchase online. You can check your credit score at either (or both) of the two credit bureau websites: Equifax.ca and TransUnion.ca.

Your credit score could be affected by errors on your credit report. If you review your credit report and find errors, you contact the credit-reporting agency and ask them to investigate the error or contact the business that listed the information and ask them to contact the credit reporting agency.

Ed O’Brien is an expert writer in personal finance, specializing in credit repair. You can find more of his articles located at CreditRepair.org.

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10 Responses to How Canadian Credit Scoring Works

  1. I checked my credit score for the first time in January and found that my score was 741.

    My parents had invested well throughout my life, so I never got tuition loans for university. A friend told me that if I had student loans and paid them off, it might bumped up my score. Can you explain why this is?

    • @Two Degrees- I think mine was around that figure too. I wonder if the better credit score with student loans payments shows the credit bureau that you can pay things like loans off? Did your friend pay his or her student loans off really quickly?

  2. Even though I have zero payments late or anything, mine is quite low at 720…
    Now I read both my equifax and transunion reports and found out I have way too many accounts. Most of them are either “closed at consumer’s request” or just unused for years and years.
    The main problem is that accounts only are removed after 7 years past the date of last activity, so even though I have cards or accounts closed/unused since 2005, they will still show up for years.
    It’s quite impossible to improve your score quickly, the easiest way is to close accounts to at least have less “available credit”. But aside from that, if you never missed a payment and have a “fair” score, you just need to be really patient :(

    • @Etienne- I have a lot of unused accounts too (like my old Mosaic BMO Mastercard I got as a student and a Sears card that I swear was forced upon me and signed up without my consent from overzealous telemarketers). I had thought that if you CLOSED accounts (e.g. like credit cards) it makes your credit score go down?

  3. That’s an interesting point Etienne. I had never heard anyone state that closed accounts had an impact on your credit score for up to 7 years (as long as they were in good standing). But it makes sense that since they still stay on the report for 7 years that they could somehow count in some sort of “number of accounts” calculation that would affect your score.

    I sure hope they don’t put a lot of weight on closed accounts that were always in good standing throughout their lifetime.

  4. Canadian credit scoring seems to work almost exactly the same as it does in the U.S., even down to the credit bureaus. In addition to Transunion and Equifax, we also count Experian as a major bureau.

    One good tip for people in the US is that we passed a law called the FCRA Act, that gives everyone the right to check their score one time per year. Go to annualcreditreport.com (its a site set up by the 3 bureaus in response to these laws).

    Do you have something like this in Canada?

  5. @ross: We have the same right, although we get the full report, you need to pay to get the actual score (i.e. number). The report allows to see errors though.

    @young: when you close them, it says “closed at customer request”. Still, it stays there for 7 years from the last activity. Basically, if you close them but you had too much credit available before, it should improve it, but if you close them and it makes your ratio higher (used $ / total available) then it’s bad. In my case, I have too much available credit so I need to close unused accounts and lower some credit limits (my aeroplan card climbed to 25 000$!!)

    • @Etienne- Oh okay, thanks for letting me know. I think I’m going to make a couple of calls to make sure any stagnant dormant credit cards are closed then. Thanks!

  6. Im 23 I got my first credit card 2 years ago (secured) low limt 300, then 1500, I have had points where it was maxed but would pay it off at the end of month, I leave a small balance(example $50ish), then I got a canadian tire with a higher limit never maxed it, same thing run a 50ish balance. my score is at 837. I pay off it right off every 4 months ish and I give them $5 dollers extra. I wonder if i pay it right off all the time will my score improve I just like to leave a little on so they make some interest money.

    • Hey John. I’m a little confused by why you want to voluntarily five the credit card company some interest money. The good news is that it won’t affect your credit score at all. As long as you make the minimum payment, the CC boys won’t go after your score. Of course, I don’t really recommend that.

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