What is a credit score?

A credit score is a numerical rating of a person's credit worthiness compared to other consumers. Equifax and TransUnion (Canada's two credit-reporting agencies) use a scale that ranges from 300 to 900; the higher the score the better the credit history in the eyes of potential lenders.

Your credit score, not only may determine whether or not a lender decides to extend credit to you, but, depending on what you are applying for, may also affect the interest rate you get.

How is your credit score calculated?

There are many variables that make up your credit score, each which can be found in your credit report. Each variable is weighted based on importance and assigned a value.

  • Payment history

    Don't underestimate the value of repaying your debts on time and for the amount expected. How you repay your debts matters and will directly impact your credit score.

  • Collection agencies and bankruptcy

    Declaring bankruptcy or having a collection agency come to you for payments will affect your credit score.

  • Outstanding debts

    Having debt isn't necessarily going to lower your credit score, but having too much debt just might, especially if it appears that you are overextended and maxed out. Keep it manageable and your credit score will reflect your responsible use of credit.

  • Account histories

    The more experience you have with using Canadian credit responsibly, the better.

  • Inquiries

    Sometimes the number of times a person's credit report is requested will affect a person's credit score. Too many requests, and a red flag may go up; which means your credit score may go down. Be selective in how often and with whom you apply for credit.

  • Credit mix

    Variety is important; it not only shows that you can use credit responsibly but it also shows that you are not over-relying on one type of credit (i.e. credit cards).

Does my credit score affect the interest rates I get?

It may, yes. The better your credit score the more likely you are to get a preferred interest rate, if one exists for the type of credit you are seeking. For example, if you are applying for a mortgage or line of credit there may be some flexibility with the interest rate you receive.

What is a good credit score? Poor credit score?

How a person's credit score is interpreted is at the discretion of the lender, so categorizing it into general terms is tricky. There are no hard and fast rules detailing what credit score is needed to be considered a person with excellent credit score, good credit score, fair credit score or a poor credit score.

In Canada, credit scores range from 300 to 900; in a nutshell, the higher your credit score, the better.

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