Your credit score is your financial pulse in many ways. Many lenders use your credit score to determine if you should have access to their various financial products, such as loans or credit cards. This can influence your life in other ways as well, as some insurance plans, jobs and apartment complexes check credit as well.
About 80 percent of Canadians  report their credit scores as good or very good, according to the Canadian government, but almost half of those same Canadians have never requested a credit report. Your credit score and report shouldn’t be a mystery, it reflects your financial health, and you should be the one in control.
The higher your credit score, the more likely you are to be approved for loans with low interest rates. Credit scores range from 300 to 900 in Canada, and according to Equifax, scores over 660  are considered good, very good, or excellent. The higher your score, the more likely you are to be approved for loans and offered special terms like 0 percent introductory rate credit cards or financing.
What is a credit score?
A credit score is a number calculated by a credit bureau, or institution that determines your financial health. TransUnion and Equifax are the two major credit bureaus in Canada. While each bureau reports scores separately, they both use algorithms to weigh different financial factors from your life, creating your score.
Your credit score is based on the following:
– Payment history, which tracks loans and credit cards are paid on time.
– Credit utilization, determined by how much credit and loan limits you’ve used.
– Length of your credit history, or how long you’ve had credit and loan accounts.
– Mix of your debt products, measuring the variety of loan and credit types.
– Credit inquiries, or how often you’ve applied for new loans in the last two years.
The algorithm of the credit bureaus weighs these factors differently, but payment history has the biggest impact on your score. Paying at least the minimum payment on your credit cards or loans every month on or before the due date is the most important thing you can do to maintain or rebuild a good credit score.
What is a good credit score in Canada?
A good credit score in Canada is generally 660 to 724, with credit scores of 725 to 759 considered very good, and scores of 760 and up considered excellent. Many lenders will consider borrowers with a score of at least 660 as an acceptable borrower, with approval rates and interest rates improving as scores continue to climb. Banks often require very good to an excellent credit rating to get approved, and there are online lenders like AimFinance that will consider a loan request with a fair credit rating.
How to check your credit score
You can check your credit score by ordering your credit report from TransUnion or Equifax. Both credit bureaus offer free reports for Canadians. You can see your Equifax credit report online while TransUnion offers a downloadable version of your report.
It is recommended to check your credit report at least once per year from each agency. If you check your report from Equifax, consider waiting six months and then checking from TransUnion so that you are effectively credit monitoring every six months instead of twelve.
When you examine your credit report, you’ll be able to monitor several elements of financial health beyond your credit score, along with being able to spot any errors to fix on your report.
Additionally, many creditors and lenders will also look at your Debt-to-Income Ratio, which is not part of your credit score but does provide an indication of creditworthiness and something lenders consider too.
What is a Debt-to-Income (DTI) Ratio?
Your debt-to-income ratio is a comparison of how much you make with how much you’ve borrowed. If your income is $5,000 per month before taxes and you pay a total of $2,000 every month for your monthly debts including car payments, student loans, mortgage or rent payments, and credit card debt, your DTI is $2,000 divided by $5,000, or 40 percent. In other words, 40 percent of your income goes to debt payments. For many lenders a DTI below 30% is preferred.
Why Debt-to-Income Ratios matter
Your DTI ratio is a prime factor in determining if you are a good candidate for future loans. If you already have a high DTI, lenders will likely be hesitant to allow you to borrow more. An additional loan would stretch your ability to repay from your income, making you more likely to run into trouble with future payments and potentially default on the loan. While your DTI ratio does not impact your credit score, it is something that most lenders and creditors look at in addition to your report and can affect your eligibility for a loan.
How to improve Debt-to-Income Ratios
To improve your DTI, you simply need to adjust one of the two numbers involved. You can make more money by taking on a new job or getting a raise. You can also lower the amount you spend in debt payments every month by paying off loans or credit cards. You might also be able to consolidate existing debts to reduce your monthly debt payments, improving your DTI.
What are factors that can influence my overall Debt-to-Income Ratio?
Your DTI is influenced primarily by two things – how much money you earn and how much debt you pay for debt every month. There is a limitation of DTI measures, however, in that it can’t determine the types of debt you have or the interest rates of those debts. A car loan with a zero percent interest rate is a very different loan than a credit card with a 20% APR.
The factors that can affect your DTI ratio include:
– Opening a new loan
– Opening a new credit card
– Spending more with a credit card, increasing minimum monthly payments
– Paying off a loan or credit card
– Consolidating debts to reduce monthly payments
– Deferring student loan payments
– A change in personal income
Sometimes people confuse their Debt to Income (DTI) ratio with their Credit Utilization Ratio, but the two are very different.
What is a Credit Utilization Ratio?
Your credit utilization ratio is a measure of how much of your credit you’re currently using. If you have a credit card with a $10,000 limit and you have used $9,000 of that limit and carry a large balance, your credit utilization ratio for that card is 90%.
Your credit score reflects your credit utilization rate across all your loans and credit cards, not just a single card, however. The more of your credit you’ve used, the higher your ratio. The more you’ve paid down or off, the lower your ratio. Low credit utilization ratios are rewarded by credit bureaus and help to improve your credit score.
Why credit utilization matters
If you’ve used most or all the available credit on your current credit cards, you’ll have a high utilization ratio. If you approach a new lender and ask to borrow more money, the lender will likely deny you the new card since it appears you are already having a hard time paying off the debts you already have.
When you keep your credit card balances low and pay down other debts, lenders can see that you are able to manage your money effectively and avoid having large loan balances. Therefore, a low credit utilization rate increases your overall credit score, suggesting you to be a better potential borrower to new lenders.
How to improve your credit utilization ratio
To improve your credit utilization ratio, you just need to pay down your existing debts. If you have high balances on your credit cards, focus your finances on paying off as much of those balances as possible. Pay down credit cards first, since they are heavily represented in this ratio. Once you’ve paid down your debts, your credit utilization ratio will improve.
You can help keep your credit utilization ratio low by not using all your credit cards and paying off the ones you do use every month. Having a credit card with a very high limit but no balance can do a great deal to influence your credit utilization ratio.
How to boost your credit score quickly
If you check your credit score and realize it’s not where you want it to be, it’s natural to want to improve quickly. Can you boost credit scores overnight? Not typically, although you might be able to make very rapid improvements if you find mistakes on your credit report and have them corrected.
If you’re looking to improve your credit score as quickly as possible, you can make a difference by focusing on your good credit habits. You’ll want to create new opportunities to improve the credit mix on your report and make as many on-time positive payments as possible. You can boost your score by:
Eliminating mistakes on your credit report
Mistakes do happen at the credit bureaus. If you find mistakes on your credit report, alert the credit bureau to have them resolved. Removing harmful mistakes can make a big difference with your credit score.
Making all payments on time, every time
If you haven’t already, consider automating your payments through your bank account bill pay so that you can be sure they go out at the right time every month. If you’re not comfortable with automated bill pay, set up reminders in your calendar instead.
Open a new secured credit card
A secured credit card is a great way to rebuild credit by effectively prepaying for a credit card and then spending and paying back your own money while still having your payments reported positively to the credit bureau every month.
Take out a small personal loan
There are bad credit personal installment loans that are tied to your income, not just your current credit score. Borrow a small amount and repay it on time and you can make easy improvements to your credit score.
Add your utilities to your credit report
You can add your utility payments to your credit report, helping to establish a solid payment history there as well as with other loans and lines of credit.
How to improve your credit score
Improving your credit score means improving the various factors that comprise your score. Since credit utilization and payment history are weighed most heavily in your credit score, focusing on those areas to improve will make the most impact on your credit score.
Make payments on time. Use reminders or automate your payments to establish a positive payment history.
Pay more than the minimum. If you can pay more on your loans and credit cards, send the extra. You’ll pay down your balances, improve credit utilization, and establish a strong payment history.
Consolidate debts. If you can pay off or consolidate debts, you’ll likely reduce your monthly payments improving your monthly budget, improve your credit utilization ratio, and be in a better position to pay off your debts completely.
What is a thin credit file?
If you have no or barely established credit, you will have a thin credit file. This simply means you don’t have much for credit bureaus to work with in terms of lending history. The individuals most affected by a thin credit file include:
– Young people who are just beginning to use credit
– Immigrants or newcomers who have yet to establish credit in Canada
– Married individuals who have not had accounts in their own name
A thin credit file can be a problem when you are trying to borrow a substantial amount for the first time. Since you have limited credit history, lenders can’t tell if you are a safe risk for their money. To help establish a stronger credit file, you’ll want to build a stronger credit presence. In addition to paying all minimum payments on time every month, also consider the following ways to thicken a thin credit file.
– Open secured or low limit credit cards and leave those accounts open to establish a longer credit history.
– Take out installment loans or personal loans based on income history rather than payment history.
– Become an authorized user on a family member’s account but be sure they have a good credit score.
– Co-sign on loans with a trusted family member.
– Ask lenders for credit increases as you establish a positive payment and credit history.
– Open new accounts and credit cards as you are able but keep balances low.
– Leave accounts open once they are paid off.
What alternative data can affect credit scores
Some credit scoring models use alternative data to help establish a financial profile. Alternative data on your credit report can include:
– Rent payments
– Utility bill payments
– Cell phone bill payments
– Other bills such as childcare or monthly subscriptions
– Bank account information
Adding alternative information to your credit report can help you by establishing a wider range of positive payments and by broadening your credit profile to include a wider range of credit types and accounts.
What are hard & soft credit inquiries?
Credit inquiries factor into your overall credit score. There are two types of credit inquiries, or requests for your credit score.
– Soft credit inquiries check your credit score and the information on your credit report, but they do not negatively impact your credit score.
– Hard credit checks happen when you request a new line of credit or loan. After the lender checks your credit score, the inquiry is reported and can negatively impact your credit score. Hard credit inquiries remain on your credit score for up to two years.
The main difference between the two is that hard inquiries are documented, becoming part of your credit report and knocking a few points off your score, while soft inquiries do not.
Why your credit score might fall
Your credit score is updated monthly based on several factors reported to the credit bureaus over the course of the month. If your credit score drops from one month to the next, it may be due to one or more of the following factors.
– A missed or late payment.
– Opening a new credit card or loan
– Rising balances on existing credit cards
– Too many new credit inquiries
– Changes in your credit utilization
– Closed credit card accounts
– A foreclosure, repossession, or bankruptcy filing
– Errors on your credit report
– Potentially fraudulent activity
Be mindful that closing credit card accounts you no longer use can affect your credit utilization ratio. Unless those cards have high annual fees, it is best practice to keep old credit cards open with no balance to improve your credit score.
If you know that you have made changes, like opening a new credit card or missing a payment, the lower credit score is understandable. If you are surprised by the lower credit score, it is always a good idea to request a copy of your credit report to be sure you are not a victim of identity theft and have new fraudulent activity on your report.
How do personal loans affect your credit score?
Personal loans are installment loans that can help your credit score in several ways. When you open a new personal loan, you’ll benefit from the account.
– Your on-time payments will be reported to the credit bureaus, establishing a positive payment history.
– You will improve the variety of the types of debts you have reported on your credit report.
You might also benefit from personal loans by using that loan for debt consolidation. If you have several smaller credit cards with high balances and high interest rates, opening a new personal loan gives you the chance to pay those cards off completely.
Pay off your credit cards and you’ll see an immediate improvement in your credit utilization ratio in your credit report. Make all the monthly payments for your new debt consolidation personal loan, and you’ll have more positive payment history and eventually get out of debt as well.
Your credit score is important – perhaps more important than you initially realized. If you have plans to buy a home or a car in the future, you’ll need to establish a solid credit history and have a good – or hopefully, excellent – credit score. Building a very good or excellent credit score takes time and intention. Get started immediately by using credit wisely, keeping balances low, and – most importantly – making all payments on time.
How to Get Your Credit Report
Visit one of the credit bureaus in Canada to request your credit report.
See the links above for details on how to get a copy of your report.