Does your credit score start at zero?

Your credit score is an important part of your financial identity. It gives you access to better interest rates, credit products, repayment plans, and credit limits. Some employers even check your credit score during your background check, especially if your role deals with finances.

Whether you're just starting to build your credit history or already have a good credit score, everyone starts somewhere. Although the lowest score credit bureaus can issue is 300, you don't necessarily start with that score unless you have really poor financial habits.

So what is your starting credit score, and how do credit bureaus come up with that number? Let's dive into what a credit score is, when you start building a credit history, what affects your credit score in Canada, how you can build one, and good credit management strategies.

What is a credit score?

A credit score is a three-digit number issued by credit bureaus and measures your financial well-being. The credit scoring model ranges from 300 to 850, with 300 as the lowest score and 850 as the highest. Your credit score measures various information about your financial data, such as credit history, payment history, bankruptcies, and credit mix.

Financial institutions, creditors, and lenders use this information to judge your financial soundness when you apply for credit, such as a credit card or a line of credit. They also use your credit score when you apply for a credit limit increase, as they want to ensure you have the means to pay back any debt you incur.

What are the FICO credit score ranges?

There are three major credit bureaus in Canada. They give you a credit score based on financial information provided by your lenders and creditors, as well as your personal information. You can get a credit score ranging from 300 to 850. Here is a breakdown of the credit scoring model:

• Poor: 300 - 579

• Fair: 580 - 669

• Good: 670 - 739

• Very good: 740 - 799

• Excellent: 800 - 850

Your goal should be to continuously work on improving your credit score as much as possible. Most traditional lenders want to see someone with a good credit score because they don't want to take on too much risk when lending you money. Know your credit score rank and monitor your progress towards building a positive credit history and score.

How long does it take to get a credit score?

You don't automatically get a credit score when you turn a certain age. Your credit history starts from the day you get approval for your first credit account. For most people, this may be a credit card or student loan. You likely have a zero credit score if you've never applied for a credit account before. Once you have your first credit account, credit bureaus will start gathering data on your credit and payment history. You get your first credit score in roughly three to six months.

What affects your credit score in Canada?

Your credit file includes your financial health and personal information. Major credit bureaus use several data points from your lender to give you a score from 300 to 850. Here's how credit scores are calculated.

Payment history

Payment history looks at how often you make on-time payments on your credit accounts. It's one of the most important factors in determining your credit score. If you regularly pay your debt payments in full by the deadline, credit bureaus see this as responsible financial behaviour, which contributes positively to your credit score. A history of late or missed payments can signal issues with managing debt and can decrease your score.

Credit mix

Credit mix is the variety of your credit accounts. The more diverse your portfolio of credits, the better for your credit score. If you only have one type of credit, such as credit cards, consider diversifying into lines of credit, personal loans, and other types of credit.

Length of credit history

Your credit history is the average years between your first and most recent credit account. The earlier you apply for credit, like a credit card, the longer your credit history will be. Lenders, creditors, and other financial institutions like to see a long credit history as it proves you can consistently fulfill your responsibilities as a borrower.

Credit utilization

The credit utilization ratio is the percentage of the available credit you use and resets once you pay off the balance. A lower credit utilization rate positively affects your credit score, as it indicates you use your credit accounts and pay off the balance responsibly.

New credit

Too many new credit accounts in a short period indicate potential financial problems. It can be more difficult to manage multiple credit accounts at once, especially if you're using them all at once. Opening too many accounts at once signals you're a riskier borrower, and lenders may not want to issue you more credit.

How to build credit

The average credit score in Canada is 680, but it takes time and healthy financial habits. Whether you're just starting to want to repair your score, here are some tips to improve your credit score and build good credit.

Apply for a secured credit card

A secured credit card has a cash deposit that acts as collateral for the card. It makes it less risky for lenders as they can take the collateral if you default on the credit card debt. If you don't have a credit history, you may not get approval for unsecured credit cards, as most require a good credit score. Getting a secured credit card can be a good way to start building your credit and payment history and work towards a good credit score.

Become an authorized user of a credit card

Most credit card companies allow cardholders to add authorized users to their credit cards. You can be added as an authorized user to someone else's credit card, which will enable you to make purchases with their card. While becoming an authorized user doesn't have a significant contribution to your credit score, it can still be a good stepping stone to building credit and practising good credit management skills.

Report rent and other payment services

Credit and loans are only among the few factors that impact your credit score. Reporting on-time payments to your landlord and utility companies can contribute to your payment history and influence your credit score. You can request them to report your payment history to the major credit bureaus so you can start building a credit score.

How to maintain a good credit score

If your credit score is less-than-stellar, it can impact your eligibility for financing. Your credit score can change monthly based on your financial behaviour. Follow these tips to maintain a good credit score and ensure you have the best options when applying for credit or a loan.

Keep your oldest credit account open

Even if you don't use your first credit card anymore, you can keep it open to maintain your credit history. A long credit history shows creditors and lenders you can manage credit responsibly and consistently. You can use your card occasionally or keep it as an open account.

Reduce your outstanding balance

A high outstanding balance results in a high credit utilization ratio. Your credit utilization ratio is the percentage of your total available credit you use. Try to stay within a 30% credit utilization ratio to have a positive impact on your credit score. If you spent a lot of money on credit this month, you can pay off part or all of your balance before you get your statement to reduce the outstanding balance and lower your credit utilization.

Go through your credit report regularly

Check your credit score regularly to monitor your progress. Not only do you get valuable insights to improve, but you also have access to the information creditors and lenders see. Take some time to review your credit report and ensure the information is accurate and complete. Dispute inaccuracies immediately to avoid having any negative impact on your credit score.

Pay your bills on time

Your payment history is one of the biggest influences on your credit score. Ensure you pay your bills on time each month as late or missed payments can hurt your credit score. If you can't pay your bills in full this month, ensure you pay at least the minimum amount required to avoid interest charges. The sooner you pay off your credit card balance, the better your payment history.

Can you build credit without a credit card?

If your credit score isn't high enough to qualify for a credit card, there are other options to build your credit score. You can become an authorized user on someone else's credit card, like a family member, ask your landlord and utility companies to report your payments to the credit bureau or get a secured credit card as it's easier to get approval.

You can also take out a personal loan or a line of credit to finance purchases instead of using a credit card. A line of credit is a type of revolving credit account where you can borrow money up to the limit repeatedly and pay off the balance with interest. A personal loan is a set amount of money given to you by a lender or creditor. You pay interest along with the principal based on your repayment plan. There are other types of loans designed for specific purchases, like a car loan, mortgage, or home equity loan.

How to check your credit score

You can access your full credit report through one of the credit bureaus. You'll see what creditors and lenders see when assessing your credit activity and history. Most credit card issuers also provide free credit reports to cardholders. Access valuable insights about the things you're doing well and how you can improve to increase your credit score.

Some credit reports may reflect slightly different information, as credit scoring models may vary based on the credit bureau. Some creditors and lenders may also have information you don't have access to, but you can still have a pretty good idea of your score and what you need to go to get it where you want it to be.

Is no credit better than bad credit?

Both cases can limit the types of credit accounts you qualify for. However, it's easier to start from zero and establish credit than to repair bad credit. If you have no credit history, you can practice good financial habits from the start and work towards a high credit score. If you have bad credit, it can take longer to repair your score as some information stays on your record for up to seven years.

Start your credit journey with KOHO

Building your credit with KOHO can be easy with our products and expert financial advice. Whether you want a virtual credit card to spend instantly or get a line of credit, you have guaranteed approval. As long as you make on-time payments and use your available credit responsibly, you're on the right track for getting a good credit score.

We provide expert guidance to give you tips and insights into your financial behaviour. You can easily track your spending habits and adjust if they don't match your goals. Get a free credit score to find out what you're doing well and if there are any concerns on the report. It gives you valuable insights into how to improve your score so you show creditors and lenders you can manage your loans responsibly.

Learn more about how KOHO can support your credit and financial journey. Whether you're looking for overdraft protection coverage, ways to earn interest and maximize your savings, or credit approval, we're here for you.