What is a credit score?
A credit score is very different from your credit history. A credit score in Canada is a 3-digit number that is based on a mathematical formula developed by credit reporting agencies. In the United States, it is generally referred to as a FICO score. The credit score is a rating of your credit worthiness.
In Canada, your credit score will vary between the main credit reporting agencies: Equifax Canada and TransUnion Canada. Banks tend to refer to these credit scores as your beacon score. The credit-reporting agenecies have their own formula to rate your credit and the score you get from Equifax Canada may be different from the score you get from TransUnion Canada.
Your credit score is used by lenders, insurers, landlords, employers, utility companies to evaluate your financial health. It is used to determine whether they want to give you a loan, the amount and the interest rates.
How is my score calculated?
A credit score is made up of financial data from lenders and your credit history. The credit scores is a method of rating and evaluating your financial behaviours, debt levels and history. Information like income, race and gender are not included as part of the scoring process.
Based on the system, you are awarded score points for actions that demonstrate to lenders that you can use your credit responsibly. At the same time, you will be deducted score points for showing that you have difficulty managing your credit, such as making late payments.
What is a good credit score?
Canadians have credit scores that range from 300 to 900 points. The best score is 900. Based on the Canadian credit bureaus, a good score would range from the mid-600 to low-700s. The majority of Canadians lie somewhere in between.
If you have a good credit score, you will find that lenders will be coming to you with offers. They will be competing to lend you money. You will qualify for the best interest rates and terms. In fact, the door will open for you and you will be offered low-rates on your credit card and it will make it easier for you to get approved for car financing, mortgages and business loans.
What is a bad credit score?
In Canada, the trend among lenders is to consider applications for those that have credit scores about 600 or higher. A credit score lower than 600 will usually mean you have to look into secondary markets for loans. You are considered to have bad credit with a score of 600 or lower.
If you have a very low credit score, you will probably not be able to qualify for new credit or loans. If you do get a loan, lenders will require you to pay higher fees, interests rates and down-payments.
A credit score will affect you in many ways, even if you don’t have a credit card, you will still have a credit score. In the world we live in today, having credit is better than having no credit at all! Your credit score is important, make sure you are on top of it by checking your credit reports regularly.