Once upon a time, getting a line of credit often came down to your personal relationship with your banker and your reputation around town as a citizen or business owner. Today, our credit score and reports have turned the decision-making process into a matter of data and algorithms, rather than public opinion.
That's not all. Credit reports and scores are now being used by more than just lenders and banks, with everyone from your new landlord to your insurance company potentially looking at your creditworthiness before doing business with you.
This means that a bad credit score can not only stop you from getting a loan, but it also may make it more expensive to get a new apartment or obtain insurance. But -- what counts as a bad credit score? What is a good credit score? Unfortunately, there's no simple answer.
Scores Range from 300 to 900
At the most basic level, your credit score is a numerical indication of your level of credit risk. In other words, credit scores tell lenders how likely you are to repay your debts.
In Canada, credit scores are generally provided by the two major reporting bureaus, TransUnion and Equifax. Credit scores range from 300 to 900, with 900 being the highest -- and best -- possible credit score.
As a basic rule, the higher your credit score, the less credit risk you represent. Consumers with high credit scores are more likely to be approved for new credit lines and will be offered the lowest rates and fees.
The Definition of a "Good" Score Can Vary
While most scores use the same basic range, the exact scores that are considered to be "good" -- versus "bad" or "fair" or even "excellent" -- tend to vary. Some lenders may consider any score above 650 to be a good score, for example, while others will prefer consumers with scores of 700 or higher.
The type of product you're after will have some of the biggest impact on what credit score you'll need to be approved. For instance, according to TransUnion, consumers with credit scores below 650 may have a hard time getting a mortgage loan, while the same score may be adequate to qualify for a used car loan.
Your Credit Scores Are Based on Your Credit Reports
Rather than focus solely on your credit scores, many people will likely be better off paying attention to their credit reports, instead. That's because your credit scores are calculated based on the information in your reports.
Additionally, not every creditor will rely on the credit scores generated by the credit bureaus. Many lenders use their own in-house credit scoring models based on your credit report data, and those in-house scores may vary substantially from the ones provided by the bureaus.
Ensuring that your credit reports are clean and accurate can help your credit scores no matter what models are used.
Many Factors Impact Your Credit Scores
When considering your credit reports and scores, it's important to know what actually goes into your credit score calculations. While the exact model used will determine the specific factors, Equifax lists five main factors used to calculate credit scores:
- Payment History (35% of Your Score)
- Credit Used vs. Available Credit (30% of Your Score)
- Credit History (15% of Your Score)
- Public Records (10% of Your Score)
- Inquiries (10% of Your Score)
While some factors can be directly manipulated to improve your score, such as paying down debt to reduce your utilization rates, other factors -- like the length of your credit history -- are more a matter of time.
Indeed, time can have a lot to do with your credit score. Studies of US credit scores have found that scores often strongly correlate to age, increasing as consumers get older thanks to longer credit histories, older account averages, higher incomes, and more life experiences (e.g., home loans, car loans, etc.).
Your Credit Scores Can Vary Based on the Bureau
In addition to variations in your score due to calculation models, your credit scores can vary based simply on which bureau's data is used to do the calculation. Equifax and TransUnion are private companies that collect information about how you use credit -- but they don't hunt it down.
Instead, many creditors will report your payment history, balances, and other pertinent account data to the reporting bureaus. However, not every creditor will report to both bureaus. Additionally, the sources of information used by each bureau for secondary data, like public records, may vary. This means you can wind up with different information on your credit reports from each bureau.
If you have accounts that report to one bureau and not the other, or information that is updated with only one bureau, you may wind up with different credit scores from each agency due to different data.
Your Credit Scores Can Change Regularly
Perhaps the most important thing to realize about your credit scores is that they're not set in stone. Your credit scores can vary from month to month, or even from day to day. This also depends on when your creditors update the credit bureaus with your most recent activity. This leaves plenty of room to improve your credit scores over time.
For example, having a credit card that is nearly maxed out can significantly hurt your credit score. If you make a large payment that greatly reduces your balance, however, you can reduce your utilization rate and improve your credit score. But it could take weeks -- or merely days. It all depends on when the issuer sends your updated balance information to the credit bureaus.
Depending on the nature of the account, some items may age off your credit report, as well. Many types of negative information can only stay on your reports for up to six years, after which time they come off your reports automatically.
In most cases, any request for your credit scores or reports will receive the most up-to-date version. This means a new credit score is typically calculated for each request that is made. It also means that a creditor could check your credit score on a Monday and a second creditor could check your score on a Friday, and each creditor may receive a different score.
There Are Two Ways to Get Your Credit Reports
The best way to stay on top of your credit is to, well, keep an eye on it. Unlike US consumers, who are limited to one free annual credit report from each bureau. Canadian consumers can request as many copies of their credit reports as they like and receive them free by mail. Free copies of your credit report will not include your credit scores, however.
If you'd rather not wait for your reports to hit your mailbox -- or you want the option to get your credit scores, too -- then you can place your order online through the credit bureau agencies' websites. Keep in mind that online copies are not free.
Despite common misconception, checking your own credit won't negatively impact your credit scores. Checking your own credit results in a soft credit inquiry (which isn't included in credit score calculations) won't. Whereas a hard inquiry could hurt your score.