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How do Credit Bureaus calculate your Credit Score?
October 26, 2022
You’re new to Canada and you are not familiar with Credit Scores because in your previous country of residence being in debt is either frowned upon or people only take credit when needed. On the contrary, this is the complete opposite in Canada. The Canadian credit-driven economy prioritizes credit in regular everyday transactions. For this particular reason, understanding how credit scores work in Canada is essential so that as a newcomer, you will not be surprised when your landlord requests your credit scores as you attempt to rent your first apartment. The best you can do to improve your financial situation is to understand where you can start off as a newcomer, whether the concept is completely new to you or you previously kept credit scores in your country of origin since your credit history is not transferable.
What it is and how you start building it
When you arrive in Canada, your credit score is basically non-existent and building it should be a high priority for you as soon as you arrive. You start building it by buying a cell phone, getting a credit card, and using credit-building tools. You can also apply for newcomer credit cards which require no security deposit and allow you to start building a credit history by using and repaying credit. By acquainting yourself with credit scores, you learn that creditworthiness is based on reports generated by credit agencies, such as Equifax and TransUnion. In other words, the credit score is the number reflecting the summary of your credit usage and repayment history. It is a three-digit number between 300 to 900 in Canada and the average Canadian credit score is 650. It is simply a modern financial tool.
Your score demonstrates your ability in managing credit and reflects the risks associated with lending you money. The score goes up if you use your credit responsibly and down if you manage it poorly. A high score helps you purchase beyond your direct financial reach and qualifies you for loans, mortgages, higher credit limits, and low-interest credit. Meanwhile, a low credit score may obstruct a landlord’s approval for your rental application despite outstanding references and a stable income.
Advantages of having a high credit score
Financiers want to know that you are Low Risk before they give you a loan or approve a line of credit. High credit scores have a huge impact on determining your likelihood of paying your loans back in full and on time when you apply for a mortgage, lease a car, apply for a credit card, an auto loan, or for loan refinancing. Some jobs require such information as well.
| Credit Score | Evaluation | Description |
| Score >560 | Poor | Unfavourable loan terms and getting credit is difficult |
| 560≤ score ≤659 | Acceptable | Unfavourable loan terms and lenders may require more |
| 660≤ score ≤724 | Good | Perceived as low risk and should not have trouble being approved for credit |
| 725≤ score ≤759 | Very Good | Better loan terms and lower required monthly payments |
| 760≤ score ≤900 | Excellent | Highest lines of credit and lowest required monthly payments, lenders may agree to delayed payment |
Credit Score Meaning
What Factors Affect Your Credit Score?
- The number and types of credits you have:
Multiple sources of revolving debt (multiple credit cards) or installment loans might tip off the credit bureau in calculating your credit score.
- The length of your credit history:
New credit accounts cause concern, they reflect some sort of instability. Meanwhile, having longer credit accounts can help financial institutions determine your risk level.
- Credit Utilization Ratio or Debt-to-credit Ratio:
It is how much credit you are using vis-a-vis your authorized amount. To score better on this criterion, spend under your credit limit and pay off the debt on time which would show healthy spending habits.
- Your payment history and your public records:
The details will show if you ever missed a payment or have ever filed for bankruptcy or foreclosure, or whether you had debt sent to collection.
- If you carry or do not have a balance on your credit card:
Over time, this could be offset if you demonstrate a good payment history and start lowering the credit account balance.
- Other factors that would help assess your potential risk.
As a matter of fact, credit bureaus use different guidelines to calculate the credit score. Credit reports coming from different agencies might show you different credit scores, depending on which factor is weighted more heavily. However, the final score always reflects a general feeling for financial institutions or landlords about your creditworthiness.
Checking Your Credit Score
Building and improving your credit score is a years-long process. Therefore, it is important to keep your score in check to know where you are standing and to make the necessary adjustments to reach your goals. There are two main credit bureaus in Canada that require a fee for credit checking, Equifax and TransUnion. They generate your credit rating – required for financial institutions to decide on the risk of lending to you. When you sign up with Dwello, your payments are directly reported to the credit bureau, and you benefit from checking your credit score regularly and for free to ensure the accuracy of your information and avoid the impact of incomplete or missing data on future transactions. To unlock the free features on Dwello sign up today by clicking below.