Rounding it up
Credit scores are a number between 300 and 900 that serve as a reflection of your credit report and trustworthiness.
Scores above 660 typically mean you’re low-risk, and shouldn’t have trouble getting approved for credit.
Your credit score is determined by factors like the number and types of bank accounts you have, your credit history, used versus available credit, and payment history.
If you’re not at your desired credit score, start by understanding your personal finances, so you can take the right steps towards improving your credit.
If you're not at your desired credit score, start by understanding your personal finances, so you can take the right steps towards improving your credit. Building towards a good credit score may seem like playing a game where you're trying to shoot for a high score. In this case, that score maxes out at 900 in Canada. But unlike most games, building a good credit score is a years-long process with some big impacts on your financial life.
By achieving a high credit score, you open up a world of financial possibility which, while not as critical when you're younger, can be a major factor down the road as you attempt to buy a home, lease a car, or receive loans to start a business. A crippled credit score can follow you for decades, and can take years of smart budgeting and financial planning to build back.
Credit scores play a pivotal role in the financial lives of Canadians, providing a snapshot of their creditworthiness. These scores are derived from a comprehensive assessment of one's credit history, compiled in a credit report. The Canadian credit score is often presented on a scale ranging from 300 to 900, with varying credit score ranges indicating different levels of credit health.
One of the critical factors considered within this credit score range is payment history. Timely payments contribute positively to one's credit score, while late or missed payments can have adverse effects. Credit bureaus, responsible for tracking and reporting credit-related information, monitor these payments closely. Moreover, a credit limit, which is the maximum amount one can borrow on a credit account, also affects credit scores. Maintaining a lower credit utilization ratio, or the percentage of available credit used, can help individuals stay within favorable credit score ranges. By understanding these key components, Canadians can actively manage their credit health, maintain a strong credit score, and access better financial opportunities.
What is a credit score?
In Canada, understanding your credit score and credit report is essential for managing your financial health. Your credit score, often referred to as the Canadian credit score, is a numerical representation of your creditworthiness and is calculated based on your credit history, payment history, credit limit utilization, and other factors. Credit scores typically fall within specific ranges, with higher scores indicating a healthier credit profile. Canadian credit scores usually range from 300 to 900, with scores above 700 generally considered good.
One of the crucial components of your credit score is your payment history. Timely payments on credit cards, loans, and other financial obligations positively impact your credit score, demonstrating your reliability as a borrower. Lenders, employers, and even landlords often rely on credit scores to assess your financial responsibility. Your credit limit, the maximum amount you can borrow, and how much of it you utilize also influence your score. Responsible use of credit, such as staying well below your credit limit, can improve your credit score and strengthen your creditworthiness.
Credit reports, compiled by credit bureaus, provide detailed information about your credit history. They include records of your borrowing activities, payment behaviors, outstanding debts, and credit inquiries made by potential lenders. Regularly reviewing your credit report is essential to ensure its accuracy and detect any errors that might negatively impact your credit score. By staying informed about your credit score and understanding the factors that influence it, you can make informed financial decisions, maintain a strong credit profile, and achieve your financial goals. Before we get into the details of how credit scores stack up, it's important to understand what credit scores are and how credit scores are calculated.
Credit scores are a three-digit number from 300 to 900 in Canada that serve as a reflection of your credit report; by contrast, credit scores max out at 850 in the United States, but are calculated in the same way. The purpose of a credit score is for lenders to calculate risk. A financial institution wants to know that you're a safe bet before they give you money for a loan or approve a line of credit. So, they run reports and calculate credit scores to determine your likelihood of paying your loans back on time, and in full.
"The purpose of a credit score is for lenders to calculate risk."
Credit score factors that impact credit history
Some of the factors that determine a credit score are the number and types of accounts you have, the length of your credit history, used versus available credit, payment history, and more.
Number and type of accounts refers to how diverse your overall financial portrait is. Types of accounts can mean revolving debt (like credit cards) or installment loans (like mortgages, car loans, personal loans, student loans, and more). Having a mix of multiple accounts shows a responsibility to manage debt from multiple lenders. Though it's important to note that taking on multiple sources of revolving debt (i.e. opening multiple credit cards) can serve as a red flag in building a credit report and calculating a score.
Used versus available credit simply means how much you spend on credit versus your authorized amount. Having multiple credit cards maxed out, for example, is another red flag for creditors. By spending under your credit limit and paying off debts on time, you demonstrate healthy and responsible spending habits that can help a lender determine your risk level. As we mentioned, KOHO doesn't affect your credit score, but using KOHO in conjunction with a credit card that you only use for special purchases, like office supplies, can be a great way to begin building healthy credit.
Payment history is a major indicator of building a credit report and calculating a credit score because it's the clearest indicator of your likelihood to pay back loans. By making on-time payments and paying off debts in full, you demonstrate a low risk to creditors.
When assessing payment history, lenders will generally take the most detailed view with regards to your payment history. These details can show specific circumstances of a bankruptcy or foreclosure, the number of accounts you have and how many late payments you have for each individual account.
New credit and length of credit will also factor into your overall credit score. Opening a number of new credit card accounts can be a cause for concern because it can reveal instability in your finances. Conversely, having credit accounts for long periods of time can project reliability in payments.
While all of these factors are important in determining credit score, they're not the only indicators. Financial institutions can also look at your income, your living situation and more to get a full picture of your potential risk.
"Having a mix of multiple accounts shows a responsibility to manage debt from multiple lenders."
Understanding the Purpose of a Good Credit Score Range
Credit scores are a three-digit number that serve as a barometer of your credit report. While credit scores max out at 850 in the U.S, in Canada, they go up to 900, yet are computed similarly.
Lenders utilize credit scores to assess risk, as they need reassurances about your ability to repay loans on time and in full before approving a line of credit.
Benefits of Having a Good Credit Score in Canada
Having a good credit score can significantly contribute to your financial stability. It's more than just a three-digit number; it's your pathway to a world of promising financial opportunities. Here are some of the benefits that you can enjoy:
Access to Better Interest Rates
One of the most immediate benefits of a high credit score is access to better interest rates. Financial institutions and credit card companies often offer lower interest rates to individuals with a good credit score. This can result in substantial savings over time, especially when it comes to long-term loans such as a mortgage. It's a simple rule: The higher your credit score, the lower your interest rate—and the more money you'll save.
Approval for Mortgage and Auto Loans
A good credit score can dramatically enhance your eligibility for major loans. Whether you're considering buying a home or a car, lenders will look at your credit score to determine your creditworthiness. Maintaining a high credit score suggests a track record of responsible financial behaviour, increasing your chances of loan approvals with more favourable terms — a crucial factor when you're negotiating interest rates on significant commitments like a mortgage or an auto loan.
Enhanced Rental and Employment Opportunities
Having a good credit score could also assist in your pursuit of rental opportunities or even certain job opportunities. Many landlords perform a credit check for potential tenants to determine their likelihood of paying rent on time. A good credit score markedly reinforces a favourable image as a reliable, responsible tenant.
Similarly, prospective landlords, especially within the highly competitive rental markets, may assess your credit score as part of their background checks. A rock-solid credit score gives them the confidence that you're financially responsible—a key trait they often look for when renting.
Okay, but what is a good credit score range in Canada?
Alright, now that we've looked at how a score is calculated, let's get into the scores themselves. One thing to note is that Canadian credit scores can vary based on who is calculating it, and which of the above factors are weighted most heavily. It's also important to remember that there is no rule saying that you need to have an “Excellent” score to be able to receive a loan or open a line of credit in Canada. Each institution will have their own guidelines, and your score is not make or break, though it is in your best interest to have the best score possible.
As we mentioned, scoring models vary, but broadly speaking, credit score ranges break down thusly:
Scores below 560 are generally considered poor, which can make getting credit difficult or can lead to unfavorable loan terms.
Scores between 560 and 660 are acceptable, but can also give lenders enough pause to require more unfavorable loan terms.
Scores from 660 to 724 are considered good.
Scores from 725 to 759 are considered very good.
Scores from 760 and up are considered excellent
Scores generated by the credit bureau that are above 660 typically mean you're low-risk, and shouldn't have trouble being approved for credit, and the higher your score is can mean better terms when it comes to loan approval. These terms include higher lines of credit or lower required monthly payments.
Getting the high score
While achieving that Excellent credit score is the goal, it's important to remember that your current credit score isn't the be-all-end-all. If you're currently at a lower score than you'd like, taking steps early on can help increase your credit score back over time. That way, when the time comes where you need a good credit score to buy a car or a home, you're in the right standing to get the most favourable terms. Checking your score early and often is key to knowing your standing and making the necessary budgetary adjustments to reach your goals and check for multiple credit scores and know your credit range and where your credit scores in Canada fall.
Make Credit Scores Work For You With Free Credit Scores and Checks With KOHO
KOHO is a great tool for helping manage your budget and setting up payments to ensure you're tackling your credit obligations quickly and regularly. By understanding how your personal finances work, you're able to take the right steps towards building and changing your credit score over time, and staying on top of your financial life.
If you're looking for a place to start, try KOHO's Credit Building tool which allows Canadians to build their credit history for only $10/month. Also, be sure to check out KOHO secured credit card options and watch for our coming credit scoring models and free credit score check options.