How does Credit work in Canada?
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By Taz Rajan, Revised by Bromwich+Smith Staff | 1800words | Reading Time: 9 minutes| Last Update: 2024/03/26
At some point in our adulthood, we all come to this realization that everything we do with credit is being tracked by this entity called the “credit bureau” in something called a “credit report”. But what does that all really mean? How does it work? Why is it so important? How can I improve my credit score? These may be just a few of the questions that come to mind when you think about credit services in Canada. You’re not alone – we have the same thoughts. So, let’s get some clarity around a concept that can have a major impact in your financial wellness.
What is the credit bureau of Canada?
A credit bureau (sometimes referred to as a consumer credit reporting agency) is a company that collects and compiles information regarding your credit history from banks, lenders, financial institutions, and various other bodies such as courthouses and the Office of the Superintendent of Bankruptcy. There are two credit reporting agencies in Canada; Trans Union and Equifax.
What is a credit report?
A credit report is a record of an individual’s repayment history. Credit cards, loans and lines of credit report to the credit bureau. Utilities, cell phones and gym memberships do not report unless they are in arrears. (If your utilities go to a collection agency or your gym membership has 3 late payments, this will show).
Credit scores range from 300-900, with the higher score being considered stronger. There is more to your credit history than just your score. The credit report shows the duration of each credit product, your payment history, credit inquiries made by lending institutions as well as your rating with each product.
Why is a credit report important?
Credit reports are used by lending institutions to determine approval for further credit as well as lending rates, based on your credit score and history. It also confirms identity. The idea is, that when you apply for credit, the lending institution looks to your history with credit. How you have handled your payments and credit in the past determines whether a new lender will lend to you, for how much, the interest rate, terms and just how flexible they will be with their lending guidelines. A credit report is a snapshot of your credit history and that is why it is so important.
What is a Credit Score?
In Canada, credit scores will range from 300 to 900, with higher scores indicating higher creditworthiness. A general idea of credit scores:
Poor (300-579): Individuals with credit scores in this range may find it difficult to qualify for credit or loans. If approved, they may face higher interest rates and less favorable terms.
Fair (580-669): A fair credit score suggests some credit history but may still result in limited access to credit or higher interest rates.
Good (670-739): A good credit score indicates a solid credit history. Individuals with good credit scores are generally eligible for a range of credit products at competitive interest rates.
Very Good (740-799): A very good credit score demonstrates a strong credit history. Individuals in this range are likely to qualify for favorable terms and interest rates on credit products.
Excellent (800-900): An excellent credit score reflects a very strong credit history. Individuals with excellent credit scores are likely to qualify for the best terms and interest rates on credit products.
It's important to note that different lenders may have different criteria for assessing creditworthiness, and credit scores are just one factor considered in the approval process. Other factors, such as income, employment history, and debt-to-income ratio, also play a role in the decision-making process.
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Which credit bureaus do banks use?
Now there is the million-dollar question! Some Canadian lenders report only to Equifax while others only report to TransUnion and some even report to both. That’s why it’s important to check both credit bureaus if you are trying to better understand your credit standing.
Can I check my own credit?
You absolutely can! Not only are there many new ways to check your own credit report, it does not lower your credit score when you do. There has been a myth that checking your own credit report can be detrimental and this is simply not true. The number of inquiries to your credit report is something credit bureaus track and these are what are referred to has hard hits. A hard hit is when a lending institution runs a credit check and that credit check is reported and tracked. A hard hit indicates you are trying to get more credit extended. If they see too many credit inquiries, your score can plummet and your ability to qualify for best rates and terms will diminish. Checking your own credit report, however, is a soft hit and will not lower your score or hinder your ability to qualify for best rates and terms.
How to check your own credit?
You can order a free copy of your credit bureau Equifax directly through Equifax once per year. Equifax also offers an ongoing monitoring service for a fee. For your free report click here
You can order your free copy of your credit bureau Transunion directly through Tans Union here
There are several third-party credit report monitoring companies. What you need to know about these third-party agencies: A. They are not the credit bureau only Equifax and Transunion are. B. They are wanting to promote their credit products by offering their free credit report. C. you are transmitting your personal information to a third-party supplier.
Most banks and credit union are now offering free credit report monitoring through online banking
Keep in mind, you may see three different credit scores from three different avenues as each lender and credit reporting agency uses a different algorithm to calculate your score.
How often should I check my credit report?
A good rule of thumb is to run an annual credit check for yourself. This way, you can spot any errors, make any corrections that need to be made and dispute or challenge inaccurate information. If you need to make corrections or changes, both Equifax and Transunion have toll free phone numbers you can contact. These numbers experience high call volumes, and it can be challenging to have the corrections made for you. For a small fee, there are a few credit experts who would be able to assist you with corrections and errors. We recommend connecting with our partner Richard Moxley of E-Credit Fix.
How long do arrears stay on my credit report?
There are many myths surrounding the length of time things like collections, late payments, consumer proposals and bankruptcies remain on the credit report. As you can see in the table below, it can range from 2 to 10 years depending on the province and type of credit blemish. What is noteworthy is that a late payment, collections and a bankruptcy will all remain on your credit report for a duration of 6 years. See chart below courtesy of Richard Moxley.
How to Improve your Credit Score?
Improving your credit score can feel like a bit of a mystery at times. But there are some good tips that can assist you to improve your score. Here are our top three tips:
Tip #1: Always keep your balances on your credit cards and lines of credit below 50% of the limit. If you have a limit of $1,000 never let the balance, go over $500. How much credit you are using at any given time vs your credit limit is called utilization and that makes up 35% of your credit score.
Tip #2: Make your payments consistently before the due date. You need to allow for processing time and missing the payment date by even 24 hours is detrimental to your score. If you’re in the habit of making your payments 1 week prior to the due date, you’ll never be late.
Tip #3: Avoid collections, judgements, and liens at all costs. Do not wait for credit to drown you and negatively impact your credit report. Get ahead of debt by speaking to your creditors before you are late to renegotiate terms or ask for an extension. Contact your Financial Planner to see if you can make other adjustments or qualify to refinance your credit. Contact Bromwich+Smith’s Debt Relief Specialists for a free, no obligation and personalized consultation.
For more details on our top three tips, visit our online webinars in partnership with Richard Moxley, author and credit expert.
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Will Canceling my credit card help my credit score?
Depending on your specific situation there are both Pros and Cons to cancelling a current credit card.
Pros:
* Reduce the temptation. For anyone who is prone to overspending, having additional credit at your disposal may hinder your success in overcoming debt and increasing your credit score. Removing the card removes the ability to overspend.
* Simplify budgeting. For some, having multiple bank accounts, credit cards, and lines of credits can be confusing and difficult to manage. By reducing the accounts, you may find it easier to track spending and monitor your budgets.
Cons:
* Impact on credit utilization. By removing current credit, you will see an immediate impact on your credit utilization ratio. You have reduced the available credit which may increase your ratio and negatively impact your credit score.
* Length of history. Closing an older card may shorten the average credit history and ultimately affect your credit score.
* Credit mix. Your credit score considers the various methods of credit you have including loans, mortgages, and credit cards. By closing an account, you may lessen your credit mix and again affect your credit score.
* Loss of rewards. If you are considering closing a credit card, ensure you have looked at your reward program. Once you close the account you may lose access to points accumulated, so it's best to cash out prior to closing any account.
Instead of closing the account all together, consider downgrading your card to a no fee version, or lower reward version. This will help you to keep the perks of your credit history without incurring annual fees. You may be able to downgrade to a lower interest rate card as well. If you do opt to close the account, make sure to monitor your credit report to ensure it is reflected properly. Try to close a card with a low credit limit or a newer card before closing the card with the longest history.
Licenced Insolvency Trustees, Bromwich+Smith have Debt Relief Specialists available to offer debt advice and debt restructuring entirely from the comfort of your own home. The first in the industry to offer video appointments with clients, Bromwich+Smith’s Debt Relief Specialists are available for initial consultation by phone at 1.855.884.9243 or via book online.
By Taz Rajan Community Engagement Partner at Bromwich+Smith
Taz has been in the finance industry for nearly 2 decades and has always been passionate about education and empowerment. Having declared bankruptcy herself, she intimately understands the shame, stigma surrounding matters of debt as well as the joy and relief that comes from restructuring. Taz actively works to normalize the conversation of debt through blogs, media interviews, webinars, lunch & learns and through building relationship