Your credit score is much more than a numerical expression of your creditworthiness. It’s the difference between getting the best interest rates on a new car, home or credit card — and getting the worst.
A good credit score empowers you to shop with the best companies and pay less overall for your purchases.
By knowing your credit score rating, you’ll know which financial products suit your situation so you don’t end up wasting your time applying for credit cards or personal loans that are outside of your means.
Scores can fall into the categories of poor, fair, good, very good and excellent. The difference between each credit score tier can result in what sort of credit card or loan is available to you, as well as the terms and rates of whichever product you apply for.
Get your credit score
The average credit score in Canada is currently around 650. However, borrowers between the ages of 18 and 25 have on average a higher score that falls around 690 (based on 2018 data).
A good credit score is typically anywhere between 660 and 724, while a very good score is between 725 and 759 and an excellent credit score is between 760 and 900.
The 2 major reporting agencies — Equifax and TransUnion — vary in how they rate the quality of a credit score. But scores generally run between 300 and 900, with 900 being the best. Scores that fall between 660 and 724 are considered “good,” and are usually the point at which you can apply for credit cards, personal loans, mortgages and auto loans.
Why you have multiple credit scores
Lenders and even the bureaus use many different proprietary algorithms to weigh the information in your credit history, but 2 scores are more widely adopted:
Equifax credit score. Anything at or above 660 is a “good” score, and 760 and above is “excellent.”
TransUnion score. A “good” rating is around 740 up to 790, while an “excellent” rating is around 830 and up.
How your credit score is determined
An Equifax and a TransUnion Score — the 2 most widely used credit bureaus in Canada — both weigh similar factors when evaluating your borrowing activity. The breakdown of your score is as follows:
15% The age of your credit history — or how long you’ve had credit.
10% How many credit applications you’ve recently submitted.
35% Your payment history, including late and on-time payments, collection actions and judgments against you.
30% Your credit utilization ratio, which is calculated by dividing your balance on existing credit cards by your available credit limits.
10% The degree to which you have different types of credit such as installment loans, auto loans, credit cards and mortgages. The more diverse, the better.
Credit accounts such as credit cards, personal loans (including debt consolidation loans) and car loans
Cell phone and internet accounts
Credit requests from creditors, lenders, landlords and employers
Bankruptcy, consumer proposals, debt management programs and any accounts sent to collections
Legal judgements as well as any liens that exist on your assets
Fraud alerts and credit accounts that have been closed due to fraud
Why your credit score matters: The benefits of being a trustworthy borrower
A higher credit score generally indicates that you can wisely manage your finances. If your score is at least 700, a lender will see you as unlikely to become delinquent on your payments, and you’ll have many more credit options available to you than if your score was lower.
Being categorized as someone with “good credit” makes you less of a credit risk, meaning you’re more likely to get approved for a loan or credit and pay less with a better interest rate. Benefits include:
Better interest rates. Flexing your healthy credit score shows lenders that you’re putting in the work to maintain your creditworthiness and will usually land you competitive interest rates.
Better financial products. Financial products are often broken down into tiers to accommodate all different types of consumers. A good credit score could get you approved for a credit card with great perks — such as higher limits and lower fees — and flexibility when it comes to terms.
Higher approval rate. As your score improves, lenders will view you as a borrower with a positive track record when it comes to handling credit which will ultimately lead to better chances of being approved for credit.
Rewards. Credit card users with a good score are often eligible for spending based incentives that could include points, bonus miles and cash back.
Cheaper car insurance. It’s true. Car insurance companies claim there’s a correlation between drivers with poor credit scores and the increased chances of a claim being filed. That mean a good credit score could save you money on your premiums.
Securing employment. Some employers will check your credit to see if you can be trusted to handle money — especially if you’ll be working with cash or the financial accounts of others. Poor credit may signal to a potential employer that financial stress could lead you to be an irresponsible employee.
Renting. To make an informed decision of whether or not you’ll be able to make rent payments on time, landlords may pull your credit report to see how you’ve handled finances in the past.
Example: How a good credit score can help you save on your next car
Let’s say you want to buy a new car but your credit score is only 620. This score is considered “poor,” and without a cosigner, it will be difficult to get that sweet ride you’ve been eyeing. Lenders consider any score less than 660 as risky or subprime (poor or below average) and may offer you a loan with a higher interest rate to offset the risk that you’ll default.
There are many auto dealers who work specifically with this group of “high-risk” consumers. You may have to settle for a less desirable vehicle and will pay much more than the average borrower with a rate that could go as high as 25%!
In addition, you may be asked to put more money down on the car. The dealership wants to collect as much in cash as possible at the beginning of your financial relationship with them in case you default on your loan.
Case study: Sandra's experience
Financing a car with a credit score of 620 vs. 740
Sandra is looking to buy an inexpensive used car from a private seller. She finds a good vehicle that runs well listed for just $8,600. Her lender says that, because Sandra’s credit score is 620, she’ll have to pay 15% in interest on a loan to buy the car.
620 credit score: Monthly payment on a $7,600 loan at 15% interest
After 4 years at 15% interest, Sandra will have paid $10,153 for her $7,600 loan (or $8,600 minus her $1,000 down payment). That’s $2,553 in interest over the life of the loan.
With an improved credit score, Sandra is eligible for a lower interest rate. For example, here’s the same transaction with a “very good” credit score of 740.
740 credit score: Monthly payment on a $7,600 loan at 5.9% interest
Here, after 4 years at 5.9% interest, Sandra will have paid $8,544 for her $7,600 loan – or $944 in interest over the life of the loan.
With poor credit, she’ll pay $34 more per month for the same car — more than $1,600 in interest over 4 years. This is the cost of having a lower credit score. If you applied those same interest rates to a $300,000 house, you’d be stunned at the difference in what you could be paying.
Walking into a car dealership with a 740 credit rating will get you the royal treatment. On the other hand, walk into that same dealership with a credit score of 620, and you may be treated differently. The dealer might tell you they are be able to sell you a car, but with your credit, they’ll charge 14% interest instead of 4%.
3 reasons your credit score is fair instead of good
There might be a few self-introduced obstacles in the way when trying to bring your credit score up. Luckily, these roadblocks can be remedied, making it a little bit easier to achieve a “good” score. Here’s what might be holding you back:
Too much debt can be a major factor in keeping your score down.
When it comes to credit, tread carefully. If you’re in college or even high school, don’t make frivolous purchases in the spur of the moment. It can take 3-6 years for a negative item to fall off of your credit report.
It’s often a good idea to sit down before shopping and write out your expenses and income. Once you have a budget worked out, you can decide on a payment that fits into your finances comfortably so you can maintain a good credit score.
Kyle Morgan is a writer and editor for Finder who has worked for the USA Today network and Relix magazine, among other publications. He can be found writing about everything from the latest car loan stats to tips on saving money when traveling overseas. He lives in Asbury Park, where he loves exploring new places and sipping on hoppy beer. Oh, and he doesn't discriminate against buffalo wings — grilled or fried are just fine.
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