What is a good credit score?

The world of credit holds many mysteries, and it’s not always easy to know exactly how it works. Yet, having what is commonly referred to as a “good credit score” directly impacts not only your ability to borrow but also the interest rate you’ll be offered (and therefore the interest fees), your home insurance premiums, the ability to choose a housing of your choice, and sometimes even the possibility of obtaining a job. Considering the importance of your credit report, it is in your best interest to better understand what it entails and how best to protect it. Let’s look at this more closely.

Who manages your credit report, and how?

In Canada, the 2 main credit rating agencies are Equifax and TransUnion. They measure and report on your borrowing capacity and financial health.

What makes up your credit report?

It consists of 2 parts:

  1. The credit score summarizes your repayment habits (e.g., payment within 30, 60, and 90 days) for each of your debts over the past 6 years. This information is transmitted every month by each creditor. It also shows the authorized credit limit and the balance due on the day the creditor sends the information.
  2. Your score is similar to the overall average you had on your high school report card. It is calculated by the credit agency using a secret formula, but mainly based on the following 5 criteria:
    Payment history (35% of the score):
  • Payment history (35% of the score): Summarizes your repayment habits. Any delay of 30 days or more is noted on your record and damages your score. The greater the delays, the greater the damage. A tip: avoid delays at all costs, no matter what the amount!
  • Credit utilization (Balance due compared to credit limit) (30% of the score): Ideally, the balance due should be less than 35% of the authorized limit. An average above 50% of the authorized credit negatively affects your score, even if you pay the full balance at the end of the month. Good to know, right?
  • Age of your accounts (15% of the score): The older your accounts, the more influence (positive or negative, depending on the situation) it will have on your score. If your accounts have been opened for a long time, creditors can more easily assess your repayment habits over time. If possible, you should keep the older ones and avoid opening too many new ones.
  • New credit inquiries (10% of the score): Each time a lender checks your credit report to grant you a loan or credit card, a note is added to your record. Creditors will tend to think that if you’re looking for credit, you’re more likely to get into debt… Knowing this, avoid multiple credit inquiries and avoid filling out credit card forms just to “win a trip”!
  • Number of creditors and variety (10%): Lenders believe it’s good to have variety of types of credit: credit card, a line of credit, a store credit card, car loan, personal loan. That said, this is not an invitation to have more debt than less! Beware of the risks of over-indebtedness and the damages it causes.

A score of 680 is often considered a minimum to be eligible for several types of loans.

To know your credit score and your score, visit www.equifax.ca or www.transunion.ca. You can get the information for free.

Now that you have this information, you will be able to make informed decisions to maintain a good credit record. That being said, the best advice we have for you is: Just because you can borrow… doesn’t mean you should!