“My credit card company says I have an outstanding balance. I’m flattered.” – Demetri Martin
Well, while this line sounds like an anecdote, trust me it is not! Credit card payments are crucial as they contribute to the credit score. So a good credit score is a must to get better access to credit when in need. There are a bunch of things that decide credit scores, are you ambiguous about what they are or what is considered as a good credit score in Canada? Worry not as this article will clear all your predicaments.
What is a Credit Score?
A credit score is a number that defines the creditworthiness of the borrower. The higher the number, the better track records of debt repayments. It is used by banks, lenders, creditors, credit card companies, etc. in order to gauge your credit history and your capacity if you would be able to repay the debt or not. It helps them analyze the risk associated with lending you money. If your score is low, you may find it extremely hard to get a loan or even a credit card.
There are two credit card rating agencies in Canada that provide credit scores, namely Equifax and TransUnion. A good credit score in Canada is said to be around 700.
Canadians use credit cards to pay for retail items, gas, bills, meals, etc. There has been a considerable hike in the number of credit cards prevalent and being circulated in the market, it was 40 million in the year 2000 and reached 79.6 million in 2019. It is almost double! Also, in the year 2019, the overall credit card debt was recorded over 100 billion dollars. The average debt in terms of credit cars was noted was also around $4240, which is quite high.
A Good Credit Score in Canada
There are different types of credit score given to an individual based on different parameters, like
- Your Total Debt
- Your Payment History
- The Types of Credits You Have
- Any New Credit You Have Recently Acquired
- Your Overall Credit History
Now, let’s talk about good credit scores in Canada.
300 – 574 = Poor
575 – 659 = Below Average
660 – 689 = Average or Fair
690 – 740 = Good
741 – 900 = Excellent
People in this credit group have really bad credit in terms of defaulted loans, higher debts, or in the past have declared bankruptcy. You should note that such details stay on the credit report for a minimum of 7 years. If you have this score, start paying off your debt or getting financial aids in the future.
575-659 (Below Average)
If your credit score falls into this category, you are likely to get a higher rate of interest, that too if you get it approved. You may also face difficulties in getting into a credit card rewards program which is quite popular in Canada. So, catch up on your debt repayments, you still have time!
660- 689 (Average or Fair)
Well, this is quite a decent credit score in Canada, and you can gain some good benefits with this ranking. You may not get a lower rate of interest, but you can still get unsecured credit cards. People get this credit score when they have defaulted on more than one creditor or have made late payments multiple times.
Well, this is considered a good credit score in Canada. This score suggests that you pay off your debts responsibility and hardly pay your debts late. This credit score will ensure that you would not have any issues in accessing more credit or loans. You may also get good cashback and rewards credit cards.
If this is your credit score, you are a rockstar. This will help you get credit with a lower interest rate and premium credit card as well. People get this credit score when they make no late payments and pay off their debts in full each month. You can get loans very easily and the other realms of easy financing become available to you, too.
Why Is It Important to Have a Good Credit Score in Canada?
A good credit score is a key to many doors of financing. It helps in the following ways.
- Opting for a Credit Card: If you have a good credit score, you are likely to get a card with lower interest and better rewards.
- Purchasing Your Dream House: For buying a house, you would take a mortgage loan, and that you can only do when a good credit score reflects in your report.
- Having a House on Rent: A good credit score is necessary for getting a house or apartment on rent as landlords are permitted to check your credit score for their safety.
- Lower Interest Loans: Your credit score determines how much responsible you are when it comes to repayment. If you have a good score, it means that lenders would have lower risk, and a lower risk means lower interest rates.
How is the Credit Score Determined?
Different factors affect your credit score, these factors can either enhance your score or alleviate it. Let’s have a look at them.
This factor accounts for like 35 percent in calculating the credit score. If you make consistent payments, it would reflect here. However, one important point to note here is that if you miss a payment and have a higher credit score, it would fall down rapidly compared to missing a payment on a lower credit score.
Usage of Credit Card
This factor accounts for 30 percent. It says how much credit you have used from the total credit you have been given. It is always better to have the usage under 30 percent for a good credit score in Canada.
Credit History Length
This element is given 15 percent weightage. People using credit cards for a long time have better credit scores, compared to those who have just started using it or use it infrequently as that denotes risk.
Credit Card Checks
This is given 10 percent importance. There are two types of checks. Soft check and hard check. A soft check is when you or someone else checks your credit score; it does not impact your score though. A hard check is when you apply for a credit card or a loan and there are too many checks in a shorter period. A hard check can have negative impacts.
Types of Credit
This also accounts for 10 percent in calculating the credit score. When you use credit for different types of things like utility, bank loan, car loan, it reflects better on your credit score. Diversification is appreciated here.
Overall Payment Pattern
Your payment pattern like you pay the due debt in minimum, more than the minimum, or in full and over how many months is also considered a crucial factor.
How can You Have a Good Credit Score in Canada?
It is not a herculean task to get a good credit score. All you have to do is follow some simple steps stated below.
- Use your credit card responsibly.
- Try to pay your credit card bills on time every month.
- You should try to reduce your credit utilization.
- Do not check your credit score if you don’t need it.
- Do not close your credit card right after you pay the dues.
Ultimately you just need to use your credit card with caution and pay the debt on time. I hope this article will help you clear all your doubts on credit score.
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