In Canada, your credit score matters—a lot. A solid credit score is more than just a number. It opens doors to financial products, saves you money and improves opportunities for renting, car insurance and employment.
Negative marks to your credit score can happen because of different factors you can’t always control: an unexpected job loss, going through a divorce, physical or mental health issues or just having trouble keeping on top of your finances. When your credit isn’t great, it can affect different parts of your life.
Understanding credit in Canada
It’s important to remember that bad credit doesn’t define you or your financial future, however. You can always turn things around. In this article, we’ll provide clear, actionable strategies, so you can improve your credit score and learn how to maintain it over time.
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What is a credit score?
Understanding your credit score is the first step to improving it. A credit score is a number between 300 at the low end and 900 at the high end. Organizations, from mortgage providers to employers, use it to predict how financially reliable you’re likely to be.
Your credit score is calculated by the credit bureaus based on information collected from lenders and outlined on your credit report. Your credit report is essentially a record of your financial behaviours over time, related to your credit products like credit cards, loans, mortgages and even some bill payments such as cellphone plans.
You can obtain your credit report for free through Canada’s two credit bureaus, Equifax and TransUnion. You can also obtain your credit score at no cost from Equifax; however, getting your score from TransUnion will require a fee (unless you live in Quebec). Each credit bureau maintains its own credit reports and credit scores, but they shouldn’t vary too much since most banks and financial institutions report the same information to both bureaus. You also may be able to obtain your credit score through your bank’s website or mobile app at no cost. You can also find it from financial companies, such as Borrowell, Credit Karma, Credit Keeper, Clearscore and Koho.
Generally, if your score is below 660, it will be harder for you to qualify for loans or credit cards, and you’ll likely face higher interest rates. According to Equifax, scores between 560 and 659 in Canada are considered “fair,” and those below 559 are deemed “poor.” Scores between 660 and 724 are “good,” making it easier to get better terms and rates. Those between 725 and 759 are seen as “very good” with credit. A credit score of 760 and above is generally considered “excellent.”
What affects your credit score?
It is important to understand how your credit score is calculated and the actions that may affect it. The factors below make up your credit score and a percentage indicating their weight when it comes to calculating your score.
- Payment history (35% of your credit score): This examines how timely you’ve been when making payments on past and current debt. Payment history is crucial—if you miss payments or pay less than the minimum amount, your score can drop, which signals to lenders you may be a risky borrower.
- Credit utilization (30% of your credit score): This is about how much of your available credit you’re using. Using too much can indicate that you might be overextending your debts and taking on more credit than you can handle, which can hurt your score.
- Credit history (15% of your credit score): This is about how long you’ve been using credit. The length of your credit history matters because a longer history shows how you’ve managed credit over time.
- Diversity of credit (10% of your credit score): This looks at the different types of credit you have access to. Having a mix of credit types, such as credit cards, loans and lines of credit, demonstrates you can handle multiple types of credit and streams of debt. But make sure you’re able to pay back any money you borrow. Otherwise, you might end up hurting your score by taking on too much debt.
- Hard credit inquiries (10% of your credit score): This considers the number of times you’ve attempted to obtain a new source of credit via a hard inquiry. Different from a soft inquiry, which is initiated either by you or a company but not for the purpose of applying for credit. For example, accessing your credit score is a soft inquiry and doesn’t ultimately affect your score. So, it’s important to only apply for new credit products you need, one at a time, or else your score could be impacted.
Immediate steps to start improving your credit
Want a better credit score and credit history? Consider taking these steps.
1. Review your credit report for errors
It’s important to review your credit report and score at least once a year, especially when you’re trying to improve it. You can obtain your credit report and score through Canada’s two credit bureaus, a third-party service or your bank’s website or mobile app, as noted above. Doing so will not affect your score.
Look over the report to see what’s documented and ensure the information is correct. You can remove incorrect information at no charge by filing a dispute directly with the credit bureaus. Errors in your report or instances of identity theft can cause your score to be lower than it should be and addressing these errors could increase it dramatically. Look for things like:
- Errors related to personal details such as phone number, reported addresses, birth date and full name
- Incorrect accounts due to identity theft
- Balances on accounts that have been paid off
- Unauthorized purchases due to fraud
It can take time for errors to completely disappear from your credit report, so the sooner you address the issue, the sooner you can start the process of rebuilding your credit.
Even if there are no mistakes, the report provides an overview of your accounts, offering insights into how to enhance your credit and better manage debt.
2. Focus on paying down debt
A history of consistently paying down debts is a good starting point for improving your credit, and it’s something you can immediately take action on. Even if you only have one big bill, it’s important to prioritize paying it down. Paying at least the required miniumum amount, on-time, every time, is crucial for your credit score. And remember that carrying debt is expensive, so you’ll want to try to pay off these debts in full as soon as possible by putting more money towards the outstanding balances.
You can do this by creating a debt repayment plan using either the avalanche or the snowball repayment methods. Avalanche focuses on paying off the debt with the highest interest rate first. By prioritizing high-interest debt, you save money in the long run and can pay off your debts more efficiently. The Snowball method has you pay off the smallest debt first, which can provide quick wins and keep you motivated with each debt that gets knocked out. Each method has its pros and cons, so pick the one that best fits your financial situation.
3. Watch out for credit repair scams
Some companies claim they can fix your credit and solve your debt problems quickly—and you may be tempted to use their services if you have a less-than-perfect credit score. However, you can only rebuild credit—there’s no quick fix.
Credit repair companies may say they will fix your credit by removing negative information from your credit report to boost your credit score—for a costly, up-front fee. These companies often take advantage of the fact that many Canadians don’t know you accurate information cannot be removed from a credit report—even if it’s bad. Be cautious of companies offering credit repair services. It’s likely a scam if a company:
- requests an “up-front” payment (this is illegal under Canadian consumer protection laws)
- offers instant approval for loans or other credit products without fully understanding your financial situation
- says it’s a “credit repair company”
- requests payment by gift cards
- uses high-pressure sales tactics
- promises to erase negative credit information
- doesn’t provide a transparent contract (or any contract at all)
- warns you to avoid contacting a credit bureau
Long-term steps to start improving your credit
While immediate actions can kickstart the process of improving your credit, focusing on long-term strategies is key to making lasting improvements.
It’s important to prioritize paying at least the minimum amount, on-time, every time for all your accounts—this is essential for building a positive payment history. To stay on top of your finances and avoid missed payments, create and maintain a budget. There are many online budgeting tools and apps that can help you establish a realistic spending plan, including Credit Canada’s free Budget Planner + Expense Tracker. Remember, a budget is only successful if you stick to it!
Using a secured credit card can also aid in rebuilding your credit score. With this type of card, you make an initial deposit that sets your credit limit, and the bank holds this deposit as a safeguard. Just remember, credit should complement your financial strategy, not replace the money you don’t have, so use it responsibly.
Get support with credit management
While there’s no instant fix for credit problems, there are ways to start building a positive credit history. It might take some time to see good financial behaviours reflected in your credit score, but when you do see the results and are able to qualify for that auto loan, line of credit or mortgage, you’ll know it was worth the effort.
As professionally certified credit counsellors with Credit Canada, we can help you understand your credit and offer personalized advice on how to address debt. Contact us today to book a free credit-building counselling session for personalized advice tailored to your financial situation.
We also offer a variety of educational webinars and workshops to empower you to take control of your finances, including Credit Canada GOLD, an innovative financial coaching program that leverages behavioural science to help you get out of debt and back into life.
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