Building your credit 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 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.
One thing to keep in mind before we get into some of the ins and outs of how credit scores work in Canada, is that KOHO does not affect your credit score one way or another. Since KOHO accounts are all prepaid Visas, you won’t have to worry about your score dipping, even if you get a non-sufficient funds notification (remember that we don’t charge NSF fees!).
What is a credit score?
Before we get into the details of how credit scores stack up, it’s important to understand what credit scores are and how they’re 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
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."
Okay, but what is a good credit score 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 scores 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 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 build 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 favorable terms. Checking your score early and often is key to knowing your standing and making the necessary budgetary adjustments to reach your goals.
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 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 seamlessly grow their credit scores for only $7/month. No extra work from you!