How to Understand, Improve, and Maintain Your Credit Score in Canada

Article Summary:

Understanding your credit score is essential for financial stability and success. In Canada, credit scores are used by lenders, landlords, and even employers to assess your financial reliability.

You start to care about your credit score more when you need to make a large life-changing purchase or your credit score starts becoming a problem as debt takes over.

This guide will help you understand your credit score, provide actionable tips to improve it, and offer strategies to maintain a healthy credit profile.

What is a Credit Score?

A credit score is a three-digit number ranging from 300 to 900 that represents your creditworthiness. It is calculated based on your credit report, which includes your payment history, the amount of debt you have, and the length of your credit history. Higher scores indicate lower risk to lenders and creditors.

How do I find My Credit Score?

There are a few different ways to view your credit score including your bank, a credit monitoring service, credit bureaus, and credit websites that partner with the credit bureaus. These are the two credit bureaus in Canada:

  • ​​Equifax Canada: Equifax is one of the major credit bureaus in Canada, providing credit reports and scores based on credit history.
  • TransUnion Canada: TransUnion is another prominent credit reporting agency that operates in Canada, offering credit reports and scores to individuals.

You can use sites like https://www.creditkarma.com/ or https://borrowell.com/ to pull your credit scores.

It’s important to note that these services are free and when you sign up they will try to sell you credit products. Do your research before signing up for any credit products or talk to a specialist like a licensed insolvency trustee or a certified financial planner.

How is a Credit Score Calculated in Canada?

Credit scores are calculated using complex algorithms that factor in various aspects of your credit report.

Although the exact formulas are proprietary, key factors include:

  • Payment History: Timely payments improve your score.
  • Credit Utilization: The ratio of your credit card balances to credit limits.
  • Credit History Length: Longer histories contribute positively.
  • New Credit: Recent credit inquiries can temporarily lower your score.
  • Types of Credit: A mix of credit types (credit cards, loans) can be beneficial.

Why Your Credit Score Matters

Your credit score affects your ability to secure loans, rent properties, and even get certain jobs. Good credit scores can lead to lower interest rates and better loan terms, while poor scores can result in higher costs or denials of credit.

Tips to Improve Your Credit Score

These tips are for users who have not gone through bankruptcy or a consumer proposal. If you have gone either one we have detailed tips below on how to start rebuilding your credit score.

  1. Pay Your Bills on Time: Late payments can significantly impact your score.
  2. Reduce Credit Card Balances:Aim to keep your balances below 30% of your credit limits.
  3. Limit New Credit Applications:Multiple inquiries in a short period can lower your score.
  4. Check Your Credit Report:Regularly review your report for errors and dispute any inaccuracies.
  5. Diversify Your Credit: Having a mix of credit types can positively affect your score.

How to Maintain a Good Credit Score

Maintaining a good credit score requires ongoing effort and attention. Here are some strategies:

  • Monitor Your Credit Utilization: Keep it below 30% of your total available credit.
  • Avoid Closing Old Accounts: Length of credit history is important.
  • Set Up Payment Reminders: Ensure you never miss a payment.
  • Manage Debts Wisely: Consolidate debts if necessary and focus on paying them down.

Here are some budgeting tips to help support a healthy financial lifestyle. 

The Impact of Credit Inquiries

Credit inquiries occur when a lender checks your credit report. There are two types:

  • Hard Inquiries: These can affect your score and can occur when you apply for new credit.
  • Soft Inquiries: These do not affect your score and occur when you check your own credit or during pre-approval processes.

It is common for a credit card application, loan, housing rental, vehicle lease, or certain utilities to pull a hard inquiry. You can always ask before the inquiry is pulled if it will be a hard or soft inquiry. 

How Does Bankruptcy Affect Your Credit Score?

Filing for bankruptcy in Canada significantly lowers your credit score, often by several hundred points, and results in an “R9” rating on your credit report, indicating debts included in bankruptcy. 

This notation remains on your credit report for up to seven years after discharge for a first bankruptcy, impacting your ability to obtain credit at favorable terms. 

How Does a Consumer Proposal Affect Your Credit Score?

A consumer proposal in Canada offers an alternative to bankruptcy for managing overwhelming debt. When you enter a consumer proposal, you work with a licensed insolvency trustee to negotiate a structured repayment plan with your creditors, typically paying back a portion of what you owe over a set period. This option results in an “R7” rating on your credit report, indicating a debt repayment proposal. 

The consumer proposal remains on your credit report for up to three years after it’s fully paid, or six years after filing, whichever is sooner, affecting your credit score during this time. While it may initially lower your score, a consumer proposal provides a less severe impact than bankruptcy and allows you to avoid the more significant consequences associated with a bankruptcy filing. 

Bankruptcy results in a more severe credit score impact with a longer-lasting “R9” rating, while a consumer proposal leads to an “R7” rating for a shorter period.

Understanding and managing your credit score is crucial for financial health. By following the tips and strategies outlined in this guide, you can improve and maintain a good credit score, ensuring better financial opportunities and stability. For more detailed information, explore our other articles on Debt Management and Prevention and Financial Education.

Rebuilding Your Credit Score

As noted above, filing a proposal or bankruptcy will hurt your credit score – but so will falling behind, missing payments, and any other activity besides paying your debts in full and on time. 

It’s important to remember that a credit score is a measure of your profitability to the banks and other creditors, and not a measure of whether you are financially responsible. 

Having said that, it is important to rebuild your credit score after any negative events, including filing a proposal or a bankruptcy. 

What Happens After A Consumer Proposal or Bankruptcy?

During a bankruptcy or a consumer proposal, you must complete two financial counselling sessions, the second of which will contain some tips and information regarding rebuilding your score. 

Tips to Start Rebuilding Your Credit

Contrary to popular belief, you can obtain new credit while in a proposal or even while in a bankruptcy – if in a bankruptcy, you must disclose that you are an undischarged bankrupt when applying for credit of over $1,000.00. It is up to the individual lenders to determine whether they want to extend you credit while still in the insolvency proceedings, and if so, on what terms. 

It is hard to do many things, such as book hotels online, without a credit card. You could opt to use a pre-paid card for this, but be aware that a pre-paid card will not build your credit score as you are not paying back credit when using it, but spending the funds you have loaded onto the card. 

Using a Secured Credit Card

A similar type of card that does build your credit is a secured credit card. With a secured card, you will pay the institution a security deposit, say $300.00, and they will hold those funds in case you are ever unable to pay your bill. 

With this card you are using credit and so a good payment history will contribute positive notations to your credit report and help rebuild your score. The two main secured credit cards available in Canada at the time of writing are the Capital One Secured Mastercard and the Home Trust Secured Visa.

Once you have established a good payment history with this card (paying it off in full every time you receive a bill) and have maintained that for at least a year, you can then apply for an unsecured credit card such as a store card with rewards that will benefit you. Before doing this, assess your ability to control your spending. If you know that over-extension of credit (spending beyond your means to pay back) is a problem for you, it may be wise to stick with the secured card only. 

Using RRSPs to Rebuild Your Credit

One other useful way of rebuilding your credit, if you have the income available to do so, is to take out an RRSP loan. These loans are specifically for the purpose of putting money into an RRSP with the same financial institution that granted the loan. You will get the tax benefits of the RRSP contribution and pay back the loan amount in installments.

You will earn interest on the funds in the RRSP, but you will also pay interest on the loan. If you default on the repayments the bank can recover the funds from the RRSP, but if you can manage the payments this is a good way to pay less tax, contribute to your credit score, and start saving for your retirement. If the RRSP contributions result in a tax refund, it is advisable to use the tax refund to then pay off the RRSP loan and save on interest.   

If you have a secured loan, such as a car loan or a mortgage, maintaining this during the proposal or bankruptcy will help to negate the negative notations as well.