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explainer

Illustration by Melanie Lambrick

Once upon a time, not too long ago but also a lifetime ago, borrowing money mostly went like this: “You’d put on a suit, go into the bank and fill in a loan application,” recalls Margaret Johnson, credit counsellor and president of Solutions Credit Counselling Service Inc. There, a banker would check your accounts, look you up and down, and decide whether you were qualified for a loan – and for how much.

As you might imagine, the human insight system was rife with human error – the official reason the financial world adopted the now-ubiquitous credit score, though no doubt ease and efficiency factored heavily. “Once everything was going digital and the internet started to be a trove of information, for better or worse, the bureaus decided a much easier way to do this was just go online,” Ms. Johnson says. “The credit bureaus just pull information from your bank, crunch you through the algorithm, and give your three-digit number.”

Your credit score is just that: an actual score between 300 (“poor”) and 900 (“excellent”) that uses your credit history, payment information and other factors to measure your supposed “creditworthiness” – the likelihood that you’ll handle a loan responsibly and repay the debt on time.


Why does a credit score matter?

It matters if you are trying to take out a loan, of course, but even if you’re not, it matters in ways you might not realize. “Your credit score is really a measure of your financial reputation,” explains Eva Wong, co-founder and chief operating officer of Borrowell, a credit score monitoring app and credit education company.

“There are so many situations where people want to know your credit score before they offer you a service or product, and at what interest rate,” Ms. Wong says. A few examples include a landlord who is considering you as tenant, a car salesman about to offer you a lease, even a would-be employer wondering whether you’ll be a reliable addition to the team.

All of the above must ask for your permission. (You can refuse, but then you probably won’t work or live there. Sorry.) Be sure to read the fine print. “When you apply for a job, a lot of applications have little tiny writing at the bottom that says you authorize them to do a credit check,” Ms. Johnson says. (Provincial laws determine who can access your credit score without permission – in B.C., for example, all three levels of government can – and judges and police often can too, along with the Canada Revenue Agency in some circumstances.)


So what’s a good credit score, and what’s bad?

“If you’ve got a credit score of 350, your financial life doesn’t exist. You’re bankrupt and nobody will talk to you,” Ms. Johnson says. “If you’ve got a score of 900, you’re walking on water. A bank will give you whatever you want.” Lenders keep mum on an official threshold, but a credit score of 660 – the number that moves you from “fair” to “good” – is often considered the bar to reach in order to access most financial services.

Credit scores are divided like this:

  • Anything above 800 is “excellent” and you will have no issues being approved for loans at the lowest available rates.
  • 740-799 is “very good,” meaning you likely have a few late payments on file but will still qualify for most premium credit cards.
  • 670-739 is “good,” so while you’ll still qualify for most loans, you’ll probably pay a slightly higher interest rate.
  • 580-669 is “fair,” but below the national average, and you’re likely ineligible for the best credit rates and cashback credit cards.
  • Finally, 300-579 is “poor,” where multiple defaulted loans mean you’ll have a hard time getting credit without paying a high interest rate – often 20 per cent and more.

That said, don’t get too preoccupied over a few points. “Lots of people get a bit obsessed with the difference between great and excellent, but that doesn’t make a major difference,” Ms. Wong says. “Going from an 800 to 850 won’t be drastic, but going from 550 to 700 is huge. Then you’ll feel a material difference in your life.”


What’s the difference between a credit score and a credit report?

If a credit report is your elementary-school report card, then your credit score is the circled B+ written in red ink at the top. “Your credit score is a literal number, between 300 and 900, an actual grade based on the information, which is the credit report,” Ms. Wong says. You should be monitoring both, but for ease and convenience, the three-digit number is what most lenders are going to want to see.


How is my credit score calculated?

There are two main credit bureaus in Canada: TransUnion and Equifax. Each uses its own algorithm, and the algorithm used changes often, but the basics remain the same. The bureaus use information provided from different financial institutions, everything from your payment history, your credit card balance, how close you are to your limit, who’s been checking your credit score and whether you’ve applied for more credit, Ms. Wong says.

If you request your credit score from both TransUnion and Equifax you might get two different numbers owing to differences in their algorithms (though the numbers are likely to be similar.)

Roughly speaking, the breakdown of your score goes something like: payment history (35 per cent), credit utilization (30 per cent), credit history (15 per cent), credit inquiries (10 per cent), and public records, i.e. bankruptcy or collection issues (10 per cent).

Payment and credit history are pretty self-explanatory; the bureau is looking to see whether you have a history of good credit and if you pay your bills on time. Credit utilization is the percentage of your allowed credit that you’re actively using and the credit inquiries portion includes your requests for more credit and any time a third party checks your credit. More on both of these to follow.


What makes for good credit utilization?

The ideal number for credit utilization is surprisingly low. “We suggest using less than 30 per cent of the credit you have available,” Ms. Wong says. “That’s quite small, I realize.” That means if you have a credit card limit of $10,000, you shouldn’t carry a balance of more than $3,000.

Yet according to a 2021 survey from Borrowell, the average credit utilization rate in Canada is 43.5 per cent. Ms. Johnson says you’re probably fine until you approach 60 per cent. “When you hit about 60 per cent of your credit limit, the algorithm flags you. It’s thinking: This person’s using more and more credit, is there a problem here? Though you haven’t even hit your spending limit, your credit score will take an unnecessary hit.


Does checking my score affect it?

This is a very wrong, very pervasive rumour about credit scores, Ms. Wong says. “Checking your score yourself does not affect the score, and in fact you should be checking your score,” she says. Note: the key word there was “yourself.”

“Every time someone else looks at your credit bureau file, you lose points,” cautions Ms. Johnson. This includes the would-be employers and landlords mentioned above, and also the creditors, any and every time you apply for more credit or a new card. You already consented to their checking, by the way – it was right there in the fine print again.

One-off credit checks are of course inevitable, but there are certain situations where your credit may be checked often, all at once, and perhaps excessively. Ms. Johnson cites the kind of situation that caught up The Globe and Mail’s money expert, Rob Carrick, whose credit score took a hit – albeit temporarily – after he added a new credit card and bought a new car with dealer financing. “If you go car shopping, for example, and you go to 10 dealerships in the process, and each and every one looks at your credit, you could lose a lot of points in a very short amount of time,” Ms. Johnson says. (We’ll get to how to hack this, read on.)


Where do I find my credit score?

It’s easy. There are many ways to find out your credit card score, Ms. Wong says. “There are apps like Borrowell to use, or your bank might give it to you, or you could go directly to one of the two credit bureaus in Canada to get it.”

Both TransUnion and Equifax will give you a free copy of your credit report and/or your credit score if you request it by phone or mail any time. But it will arrive in the mail, so if you need your information instantly you’ll have to pay for it. Why should you have to pay for your own information? Because, technically, it’s not yours. “The credit score is actually the intellectual property of the credit bureau, so you have to pay to get your score if you want it fast,” Ms. Johnson says.

There are also many credit score monitoring apps available. In 2014, Borrowell became the first app in Canada to offer users free access to their credit scores. Vancouver-based Mogo offers free scores when you sign up for their prepaid MogoCard Visa. Credit Karma is a U.S. company that’s partnered with TransUnion; they’ll give you free access to your credit score in exchange for tracking your shopping habits and sending targeted ads.


How often should I check my credit score?

At Borrowell, two million users of the app can access their weekly-updated credit score, for free. (As well as partnering with Equifax, Borrowell makes money by advertisements and recommendations on their site.) Likely because they’ve embraced such apps, younger people tend to check their credit report more than their older counterparts, according to a 2021 survey by Equifax.

Many of us won’t ever monitor our score that closely, however. Ms. Johnson suggests ordering your report and score annually, in January, just because it’s a good time to touch base with all your financial accounts and fine-tune your budget for the year. You should be looking at your partner’s report too. “If you’re in a relationship with someone or you live with someone, you need to exchange credit reports so that you each know what the other is doing in case you could be on the hook for their debt,” says Ms. Johnson. In British Columbia, for example, the new Family Law Act says that one spouse can be responsible for the other’s debt – whether they knew about it or not. So be smart and know about it.


What if I think my score is wrong?

Even if you don’t think it’s wrong, take Ms. Johnson’s advice and get into the habit of requesting your credit report annually to make sure the information and numbers are correct. This includes your personal information (name, current address, birthdate) as well as things like late payment penalties. Any accounts listed or credit card inquiries you didn’t make could be a sign of identity theft, and negative information – like bankruptcy – should be removed after the set date (for bankruptcy, that’s seven to 10 years).

If anything on your credit report looks fishy – like a late fee for a payment you made on time (it happens!) – call the credit bureau and inquire further.


How can I improve my credit score?

First and foremost, pay your bills on time. Automate those payment if you’re forgetful, because even a day or two late, even just a few times, can add up fast. This is something young people, or anyone with a more cavalier attitude to money, need to remember. “Young people often don’t realize that if you don’t pay your phone bill on time, all the time, you’re chipping away at your credit score,” Ms. Johnson says.

To reduce your credit utilization, look to those pre-approved credit cards that arrive in the mail and don’t just toss them in the bin. “Twice a year, usually in April before summer and October before the Christmas season, the credit companies target customers and encourage them to raise their limit,” Ms. Johnson says. They want you to keep shopping, of course, but if you have the willpower to take the raise and not spend it, then you absolutely should. Why? Because it will immediately shrink your credit utilization percentage and your credit score will rise accordingly.

Be cautious of who and how many people you permit to access your credit. To return to Ms. Johnson’s car shopping example, as promised, you don’t need to let 10 different dealerships peek at your information before they offer you an interest rate. Instead, order your own report, and take it with you.

Lastly, and with minimal effort, you can improve your credit score just by being patient. Nothing is on your report forever, Ms. Wong says. “Everything will drop off eventually, even something serious like bankruptcy, but it will be a while.” Start cultivating better habits and watch your credit score creep upward on its own accord.


The bottom line

What to know about a credit score
  1. If your credit card were your report card, your credit score is the grade you earned. The three-digit number ranges from 300 (“poor”) to 900 (“excellent”)
  2. Your credit score is calculated by the credit bureau based on your payment history, credit utilization, credit history and credit inquiries
  3. You can and should check your own credit score at least once annually – which won’t affect your score. When a third party checks, however, you could indeed lose points
  4. If you think your credit score is wrong, request your credit report and check all the information. Call the credit bureau with any errors or if anything looks suspicious (a sign of identity fraud)
  5. The best and easiest way to raise your credit score is to pay your bills on time, all the time, and use no more than 30 per cent of your available credit