Area of Law: Credit, Debt and Bankruptcy
Answer Number: 0284
What is a credit score?Region: Ontario Answer Number: 0284
A credit score is a three-digit number calculated using a formula based on the information in your credit report. A credit score is different from a credit report. A credit report is a file kept by credit reporting agencies that contains information on a person’s credit history. Credit reports also contain credit ratings, which are codes that lenders use to rate how and when you make payments. Each separate credit account you have will have a credit rating.
In Canada, credit scores range from 300 to 900 points, with 900 being the best score.
Lenders generally rate your credit score as follows:
- 760-900 = Outstanding
- 725-759 = Very Good
- 660 – 724 = Good
- 560 – 659 = Average
- 300 – 559 = Poor
Credit scores may be used if you are applying for a personal loan, a car loan, a credit card, a mortgage and even when applying to rent an apartment. A higher credit score will improve your chances of being approved, while a lower credit score can either decrease your chances, or you could be charged a higher interest rate.
Although each lender sets its own guidelines regarding the minimum credit score you need for them to loan you money, generally, a credit score above 650 will be enough for you to qualify for a standard loan.
What factors impact your credit score?
Each credit agency calculates your credit score differently. Common factors include:
- what types of credit you have
- whether you have a balance on your credit cards
- how long you have had credit
- the amount of your outstanding debts
- how close you are to your credit limit
- how often you apply for additional credit
What will damage your credit score?
Your credit score will decrease for activity that shows you have difficulty managing credit, such as:
- a history of making late payments,
- having your account sent to a collection agency,
- too many recent hard inquiries (for example, applying for a lot of credit cards in a short amount of time may indicate that you are having financial difficulties ), or
- an insolvency or bankruptcy.
Improve your credit score?
You can improve your credit score in a number of ways, including:
- making all your payments on time,
- checking your credit report and correcting any errors (you can order your credit report for free once a year from Equifax and TransUnion; you can also request your credit score, although you may need to pay a fee), and
- if you have no credit history, by opening a secured credit card account, using it, and paying off your balance each month.
When deciding if you are a good risk for a loan, lenders will also consider other factors along with your credit score, such as your income, type of employment and assets.
For more information regarding credit reports and credit scores, visit canada.ca.
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