Area of Law: Credit, Debt and Bankruptcy
Answer Number: 0284
What is a credit score?Region: Ontario Answer Number: 0284
What are credit reporting agencies?
Equifax and TransUnion are the two major credit reporting services in Canada. They collect an individual’s credit and debt information from banks, lenders, credit card companies, leasing firms, courts, and others. These agencies, also called credit bureaus, do not report on your annual personal income, family income or how much you have in the bank — only your debt, available credit, and the public record (bankruptcies, court judgments, etc.). In Ontario, credit reporting agencies and consumer credit reports are governed by the Consumer Reporting Act.
Credit reporting agencies collect this information about your credit history and record it in a credit report. They also provide credit scores and credit ratings that are based on this information, and are used by lenders to determine if you are not only a good risk to lend money to, but how much, and for what rate.
It is important to note the difference between a credit score and a credit rating. Your credit score will tell a lender how overall financially responsible you are at any given time, while each separate credit account you have will have a credit rating.
Your credit score is separate from your credit report. Your credit score is a three-digit number calculated using a formula based on the information in your credit report. In Canada, credit scores range from 300 to 900 points, with 900 being the best score.
Lenders generally rate your credit score as follows:
- 760-900 = Outstanding
- 725-759 = Very Good
- 660 – 724 = Good
- 560 – 659 = Average
- 300 – 559 = Poor
(Source: BMO Bank of Canada)
Credit scores may be used if you are applying for a personal loan, a car loan, a credit card, or even applying for a mortgage or to rent an apartment. A higher credit score will improve your chances of being approved, while a lower credit score can either decrease your chances, or you could be charged a higher interest rate.
Although each lender sets its own guidelines regarding the minimum credit score you need for them to loan you money, generally, a credit score above 650 will probably be enough for you to qualify for a standard loan.
What factors determine your credit score?
Each credit agency calculates your credit score differently. Common factors include:
- What types of credit do you have?
- Do you carry a balance on your credit cards?
- How long have you had credit?
- What is the amount of your outstanding debts?
- How close are you to your credit limit?
- How often to you apply for new credit?
What will damage your credit score?
Your credit score will go down for activity that shows you have difficulty managing credit, such as:
- a history of making late payments,
- having your account sent to a collection agency,
- too many recent “hard’ inquiries (for example, if you apply for a lot of credit cards in a short amount of time, this may be interpreted as you are having financial difficulties ), or
- an insolvency or bankruptcy.
What will improve your credit score?
You can improve your credit score in a number of ways, including:
- make all your payments on time,
- check your credit report and correct any errors (you can order your credit report for free once a year from Equifax and TransUnion; you can also request your credit score, although you may need to pay a fee)
- if you have no credit history, open a secured credit card account and begin using it, paying off your balance each month
Although important, when deciding if you are a good risk for a loan, lenders will also consider other factors along with your credit score, such as your income, type of employment and assets.
For more information regarding credit reports and credit scores, visit canada.ca.
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