Credit scores in Canada measure a borrowers’ credit risk based on a valuation of their financial history including details on credit cards, loans, mortgages, credit and payment history.

A favorable credit score is an important factor in applying and securing the mortgage of your choice. It also makes it easier for an individual to get credit cards, and loans on favorable terms, sometimes even with instant approvals. The higher your score, the lower the interest rate! The difference between a good and bad score can increase the cost of a loan by 3% or more. It is wise to start working towards a high credit score earlier on so you can reap the benefits of lower mortgage rates later on.

In Canada, credit scores are generated by three private agencies – Equifax, Trans Union and Experian. Though all 3 bureaus offer FICO (Fair Isaac Credit Organization) credit scores using the formula developed by Fair and Isaac, each has given it a unique name. Equifax calls it the Beacon Credit Score, Trans Union calls it FICO score and Experian calls it the Fair, Isaac Risk Model.

Equifax is the most widely used credit score and totals can range from 300 to 900. The break-up is as follows:

It is important to understand that different lenders set their own policies and tolerance for risk when making credit decisions, so there is no single “cutoff score” used by all lenders.

Equifax published the national average FICO score range which you can see below.

You can also see the corresponding delinquency rates based on these scores:

It’s easy to see why lenders use these to evaluate prospective borrowers!

Factors that affect your credit score

1. You’ve been looking for credit in the past year

If you’ve been recently been seeking credit, this is evident on your credit file based on the number of inquiries in the past 12 months. Research shows that consumers who are seeking new credit accounts are riskier than consumers who are not seeking credit.

There are both credit and non-credit inquiries on the report and the score only considers those related to credit applications. Inquiries such as your bank reviewing your account or you requesting a copy of your own report are not considered.

The scores can identify “rate shopping” so that one credit search leading to multiple inquiries being reported is usually only counted as a single inquiry. It’s been reported that for this to occur the person making the inquiry must use Equifax’s “mortgage code” when requesting your credit score (ie. “FM” is in your Equifax member number).

For most consumers, a few inquiries on your credit file has a limited impact on FICO scores.

Do inquiries drop my credit score?

A common misperception is that every single inquiry will drop your score a certain number of points. The impact of inquiries on your score will vary depending on your overall credit profile, and it can drop anywhere from 5 to 20 points on the first mortgage inquiry, but this is different for every case.

Inquiries will usually have a larger impact on the score for consumers with limited credit history and on consumers with previous late payments. The most prudent action to raise your score over time is to apply for credit only when you need it.

2. You have a short credit history

Age of your credit on revolving or non-revolving accounts also affects your credit score. Revolving accounts are credit cards such as Visa, MasterCard, or retail store card that allow you to make a minimum monthly payment and “revolve” the remainder of their balance over to the next month.
Non-revolving accounts include cards such as American Express and Diners Club and must be paid off in full each month.

Research shows that consumers with longer credit histories have better repayment risk than those with shorter credit histories. Also, consumers who frequently open new accounts have greater repayment risk than those who do not.

If you can maintain low balances and make sure your payments are on time, your score should improve as your revolving credit history ages.

3. Non-mortgage debt is too high

Consumers with larger credit amounts have a greater future repayment risk than those who owe less, resulting in the score measuring how much non-mortgage related debt you have.

The total outstanding balance on your last credit card statement is generally the amount that will show in your credit bureau report. Even if you pay these off in full each month, your credit bureau report may show the last billing statement balance.

Paying off your debts and maintaining low balances will help to improve your credit score. Consolidating or moving your debt into one account will usually not, however, raise your score, since the same amount is still owed.

Bankruptcy on the credit report is a borrower’s worst nightmare, as it stays on record for almost 10 years and reduces your score by 200 points or more.

4. Not paying off your loans

If you have installment loans and owe money on them, this does not mean you are a high-risk borrower. Paying down these installment loans is very positive as it shows that you are willing and able to manage and repay debt, and a successful repayment history is good for your credit rating.

One measurement is to compare outstanding loan balances against the original loan amounts. If you took out a $1,000 line of credit 1 year ago and still owe $925, this shows that you may be having trouble paying off the debt. Generally, the closer the loans are to being fully paid off, the better the score. This metric has limited influence on the FICO score.

Paying off loans on a timely basis reflects well on your credit score, but if you really want to improve it, try to pay the loans, (especially non-mortgage debt) as quickly possible.

Credit scores are an important part of the mortgage application and house buying process, and you do have some control over the results. Regular checks to keep on top of your credit history will help prevent any nasty surprises when you buy your next property and you’ll be on the ball when your bank manager says, “Now about your Beacon….”.