It’s always a great feeling when you reach a new financial milestone. You may have certain goals that you’ve been saving up for for a long time, such as buying a new car or your first home. But even if you’ve saved up enough money for your initial down payment, there’s one important factor that could be getting in your way: your credit score.

Your credit score is what lenders look at when approving your loan or mortgage application. To qualify for the best rates from prime lenders, you should make sure that you have a good credit score before you apply. A bad credit score could prevent you from getting the funds you need to reach your financial goals.

Not sure where to start? In this post, you’ll learn what a credit score is, how your credit score is calculated, why your credit score matters, where you can find and track your credit score, and how to improve your credit score to reach your next financial goals.

What is a credit score?

Your credit score is a number between 300 and 900 that lenders look at to evaluate your creditworthiness, or your ability to pay back debt on time. Think of it like your overall financial grade! A high score means that you are very likely to pay back your debts in full and on time, while a low score means you are less likely to pay back debts.

Credit scores generally range from poor to excellent, which means your credit score could fall into one of these five buckets:

  • Excellent: 741-900
  • Good: 713-740
  • Fair: 660-712
  • Below Average: 575-659
  • Poor: 300-574

If you have a good or excellent credit score, you’ll be able to work with prime lenders and qualify for competitive interest rates and terms on credit cards, loans, mortgages, and other financial products.

If you have below average credit, you may have trouble getting approved for some financial products. For example, if you’re looking for a home, the minimum credit score required by the Canadian Mortgage and Housing Corporation (CMHC) for mortgage loan insurance is 600.

With below average credit, you likely won’t qualify for the lowest interest rates possible from prime lenders. You might only be able to work with subprime lenders, which can cost you money in the long-run.  

How is your credit score calculated?

Your credit score is calculated by Canada’s two main credit bureaus: Equifax and TransUnion. They calculate your credit score based on five key factors from information generated on your credit report. Each factor makes up a certain percentage of your overall credit score. The five factors are listed below with a brief explanation:

  1. Payment history (35%): Payments towards your credit accounts, including credit cards, loans, and certain bills, are recorded on your credit report. Having a spotless payment history will improve your credit score calculation.

  2. Credit utilization (30%): Your credit utilization rate is how much credit you use out of the total credit limit available to you. For example, if you have a credit card balance of $500 and your total credit limit is $1,000, your credit utilization rate is 50%.

  3. Credit history (15%): Your credit history includes how long you’ve had credit accounts open for, the age of your oldest credit account, and the average age of all of your credit accounts combined.

  4. Credit mix (10%): Having a mix of products with on-time payments on your credit report, including different credit cards and loans, shows lenders you can handle financial obligations successfully.
  1. Credit inquiries (10%): Whenever a lender performs a credit check on you, it’s recorded as a hard credit inquiry on your credit report. Having too many hard credit inquiries on your credit report can negatively impact your credit score.

Why does your credit score matter?

Your credit score matters because it’s one of the main indicators that lenders look at before approving your applications. If you’re looking to buy a new car or get a mortgage on your first home, you need to make sure that you have a good credit score of at least 600 to qualify.

Individuals with higher credit scores qualify for premium credit cards with perks, lower interest rates on loans, and more favourable terms on mortgages. Having a good or excellent credit score can make a considerable difference when you’re trying to reach your financial goals.

Your credit score also impacts other areas in your life. Some employers perform credit checks before approving job applications, and many landlords will review tenant credit reports before approving rental applications. Because of the reasons above, it’s in your best interest to keep your credit score as high as possible.

Where can you find your credit score?

You can get your credit score directly from Equifax and TransUnion, but there may be limitations to how often you can check your credit score or what information you can see. To regularly monitor your credit score, get alerted when your score changes, and learn why your score has changed, the credit bureaus may charge you for premium access.

There are service providers in Canada that can provide you with your credit score free of charge. They can also provide features to help you regularly monitor and improve your credit score. For example, Borrowell gives you your credit score for free and provides weekly updates to help you keep track of your score. You’ll also receive personalized tips on how to tweak your financial habits to improve your credit score. With the Borrowell platform, you can get recommendations and see your approval chances for credit cards, loans, and mortgages based on your credit score.

Tips to improve your credit score

If you want to move your score from average to excellent, you can start today by taking specific steps to improve your credit score. If you’re overwhelmed by how and where to start, here are some general tips you can follow.

Pay your bills on time, every time: Paying your bills on-time is the most straightforward way to improve your credit score. Maintaining good habits and building a good payment history can help you increase your credit score over time.  

Don’t overuse your credit cards: Carrying high balances on your credit cards can hurt your credit score. Because credit utilization is the second largest factor that impacts your credit score, you should make an effort to keep your credit utilization rate in check. The golden rule is that you should keep your credit utilization rate under 30%.

Increase the credit limit on your credit cards: Another way to reduce your credit utilization rate is to increase the credit limit on your credit cards. Try asking your provider for an increase on your credit limit to help you reduce your utilization rate.

Don’t apply for too many financial products all at once: When you apply for a financial product, the lender will perform a hard credit check that will temporarily decrease your credit score. If you’re shopping around for credit cards, loans, or mortgages, you should compare products and know your approval chances before applying for one. This can help you reduce hard credit checks that impact your score.

Keep your oldest credit card open: A long credit history will boost your credit score. Credit cards age like fine wine: the older they are, the more beneficial they can be for your credit score. If you have a credit card that you no longer use, keep it open to maintain an established history of good credit.

Review your credit report often and make sure there aren’t errors: The Financial Consumer Agency of Canada recommends that you regularly check your credit report for errors. These errors could be bringing your credit score down. With Borrowell, you can download your credit report for free on demand. If you spot an error on your credit report, you should file a dispute directly with Equifax or TransUnion.

Your credit score is an essential part of your financial health. If you want to impress lenders, make sure it’s as high as possible when you’re shopping around for a new credit card, a new set of wheels, or your dream home. There are free platforms like Borrowell available to help you check, monitor, and improve your credit.

Borrowell is a Canadian company with a mission to make financial stability possible for everyone. With over 1.5 million members, Borrowell offers free credit scores, credit building solutions, credit coaching and personalized financial product recommendations.