Understanding your credit score

If you’re looking to borrow money, it’s important to understand your credit score. It comes into play when you apply for credit cards, personal loans and other types of credit products.

Lenders look at your credit score when reviewing your application. Factors that can impact your score include how much debt you’re carrying and your credit history. Your credit score gives them a good idea of whether you’ll make your payments on time.

In Canada, credit scores range between 300 to 900. If you have a higher score, you’re considered lower risk as you’ve generally handled credit well in the past. And this may come with benefits, like potentially being offered a lower interest rate, making the cost of borrowing less.

Your score changes over time. It goes up or down based on the amount of debt you owe and whether you make your repayments on time. Wondering how you can increase your score? There are different things you can do to help improve it.

Let’s dive into some frequently asked questions about credit scores.

Everything you want to know about your credit score

• How’s your credit score calculated?
• Why should you check your credit report?
• What are mistakes you should check for in your credit report?
• How do you fix a mistake in your credit report?
• Where can you check your credit score?
• Will checking your credit score lower it?
• What’s a good credit score?
• How to increase your credit score?

Why should you check your credit report?

It’s important to check your credit report on a regular basis to see if there are any mistakes. If there’s an error, you may see a drop in your credit score. Your lender may turn you down for a credit card or loan, or they may charge you a higher interest rate.

Companies and individuals may request to view your credit report. They can include:

• Car leasing companies
• Mobile phone companies
• Insurance companies
• Employers
• Landlords
• Financial institutions

Checking your credit report is considered a "soft check" and doesn't affect your credit score. You can order a free copy of your report from Equifax and TransUnion.

Source: Credit report and score basics, Financial Consumer Agency of Canada.

How do you fix a mistake in your credit report?

You can ask Equifax and TransUnion to fix a mistake for free. You have the right to challenge any information on your credit report that you believe is wrong. Find out more.

Source: Checking for errors on your credit report, Financial Consumer Agency of Canada.

Will checking your credit score lower it?

That depends on who’s checking it.

If you’re doing the checking and not applying for credit, that won’t affect your score in any way. This is called a “soft inquiry.” If a lender is checking it because you’ve applied for a loan or credit card, your score might go down a few points. This is called a “hard inquiry.”

In general, you should limit your number of credit applications. Having too many “hard inquiries” on your credit report in a short period of time could lower your score. A lower score will make it more difficult to borrow money.

Source: Improving your credit score, Financial Consumer Agency of Canada.

How to increase your credit score

Information in your credit report gets updated at least once a month. This gives you an opportunity to boost your credit score over time if you’re looking to borrow money in the future.

Here are four tips that could help improve your score:

1. Pay your bills on time, every time

   Your payment history bears the most weight on your score. So, consider staying on top of your bills and don’t skip a payment (even if a bill is in dispute). One easy way to do this is to set up pre-authorized payments.

   If you can’t pay the full amount that you owe, consider paying at least the minimum. And if you’re having trouble paying a bill, get in touch with your lender.

2. Use credit in moderation

   Try to use less than 35% of all your available credit. If you go over 35% or max out your credit, lenders may see you as a greater risk. To calculate your available credit, add up the credit limits for all your credit products. This includes credit cards, lines of credit and loans.

   For example, let’s say you have a:

   • Credit card with a $3,000 limit
   • Personal line of credit with a $7,000 limit

   Your available credit is $10,000. To help increase your credit score, try not to borrow more than $3,500 at any given time.

3. Establish credit history

   The longer you have a credit account open and in use, the better it is for your score. Consider leaving old accounts open and keep them active and in good standing.

   Don’t have a credit history yet? Consider establishing a credit history by getting a credit card and using it for regular purchases. But you should try to pay the full balance each month. If you are unable to, be mindful of how much debt you rack up. You could end up hurting your credit score if you’re carrying too much debt or miss a payment.

4. Use different types of credit

   Your score may be lower if you only have one type of credit product, such as a credit card. It can be a good idea to have a mix of credit products, such as a car loan, credit card and line of credit. Make sure, however, that you’re not overextending yourself. Don’t take on more debt than you can afford. Learn about what to consider before borrowing money.

Source: Improving your credit score, Financial Consumer Agency of Canada.

The bottom line

Your credit health is important. Having a good credit score and understanding how to increase or maintain it will boost your financial confidence and security.

This material has been prepared for informational purposes only and is not intended to be a substitute for obtaining advice from a financial professional.

Adapted with permission from the Financial Consumer Agency of Canada, 2022.