Understanding Your Credit Score

How to Understand Your Credit Score

When it comes to applying for financial products like a mortgage, loan or a credit card, lenders will typically look at your income, existing debts and any assets you own to determine if you’re eligible for their services.

One of the most important factors that they check is your credit score.

They’ll check if you pay your bills on time, if you’ve paid back past debts and if you have any outstanding payments to your name.

This will help the lender determine if they have a good chance of getting their money back if they decide to lend for you.

Contrary to what many people think, your credit score isn’t some mysterious number that is determined by magic.

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It’s a number that changes depending on your financial health.

People that pay back their debts and credit purchases on time tend to have a better credit score than those who are late with their payments or have mounting debts.

Similarly, people that don’t use their sources of credit won’t have much of a credit history, making it difficult to determine if they would have a high or low credit score.

This can be a relatively difficult topic to cover, so in this comprehensive post, we’ll be helping you understand more about your credit score and what you can do to ensure a healthy financial future.

What is a credit score?

Your credit score is a value that determines your eligibility for certain financial products that involve credit.

This could be loans, a credit card or even a mortgage for your home.

It’s a value that displays how trustworthy and reliable you are with credit so that lenders can offer you interest rates and products based on your financial history.

With around 71% of all Canadian families having some debt, this means that a large portion of the country’s population will have some kind of credit score.

It also shows that a large portion of families take out credit for future purchases such as a home, a car or even student debt.

In Canada, credit scores are rated from 300 to 900. Here’s a quick breakdown of what those values could imply:


  • 300 to 549 is a poor credit score which will make it difficult for you to approve any kind of credit. It will make getting a loan difficult, it will be almost impossible to get a mortgage and the interest rates you’ll be offered could be as high as 40% or even more.


  • 550 to 649 is a fair credit score that still makes it difficult for you to apply for credit products. You’ll have a slightly higher success rate than a very poor credit score and you’ll be given plenty of opportunities to repair your score, but do expect fairly high-interest rates and limited accessibility.


  • 650 to 749 is a good credit score. This is where most Canadians sit in terms of their credit score. You’ll have a fairly easy time applying for loans or a mortgage and you’ll be offered fairly standard interest rates. This is a great opportunity to continue building your credit score, especially if you’re looking to save money in the long run for future financial investments like a house.


  • 750 to 799 is a very good credit score that will offer you excellent interest rates and easy access to virtually any credit products. However, since this range is relatively small, we do suggest focusing on building up your credit score even more to unlock the best tier of interest rates.


  • 800 to 900 is in the excellent range. You’re essentially guaranteed approval for any kind of financial product you apply for and you’ll also be given the best interest rates. Do note that being in this range doesn’t require you to be wealthy–you just need to be vigilant about your credit payments!


Do keep in mind that these are fairly rough estimates of your credit score.

Some lenders might consider 600 to be the average before they consider you for their products, while some might only work with people that have a low credit score, specializing in credit repair products with high-interest rates.

It’s worth requesting a credit report on a fairly regular basis because it helps you keep track of your credit ratings.

It also allows you to see if there are any outdated claims or bad marks on your credit report which can be disputed and removed.

This could greatly improve your credit score and opens you up to new financial products with lower interest rates.

What is a credit rating?

A lot of people use the terms credit rating and credit score interchangeably, but they’re different things and it’s worth understanding the differences if you request a credit report.

A credit score is calculated by a credit bureau such as Equifax or TransUnion who will give you a score between 300 to 900 as explained above.

This will be shown on your credit report and will often come with a small description of why you’ve been given that credit score.

In another section of your credit report, you’ll find information that has been submitted from creditors and lenders that describe their experiences with you.

Each entity will give you a credit rating that is described using a letter and a number.

These are known as credit rating codes and are explained as follows:




  • I means Installment Credit, such as money borrowed for a specific time that is paid in fixed amounts on a regular basis. This is something like a car loan or personal loan.


  • O means Open Status Credit which is money borrowed when needed up to a certain limit. This could mean a mobile phone tariff that charges extra for going over a certain cap.


  • R means Revolving or Recurring Credit such as a credit card. You can borrow money up to a certain limit whenever you want, but you must make regular payments to pay off the credit.


  • M means Mortgage Loan and will cover any mortgages that you’ve taken out on a property or house.




  • 0 – Too new to rate or approved but not yet used
  • 1 – Paid within with agreed timeframe or within 30 days of billing
  • 2 – Payment that was between 31 to 59 days late
  • 3 – Payment that was between 60 to 89 days late
  • 4 – Payment that was between 90 to 119 days late
  • 5 – Payment that was over 120 days late but not yet rated a 9
  • 6 – Unused code
  • 7 – Making regular payments with a consolidation order, orderly payment of debts, consumer proposal or a debt management program with a credit counselling agency
  • 8 – Repossession
  • 9 – Written off as bad debt, sent to a collection agency or bankruptcy



For a credit card account, a rating of R1 means that you’re paying on time and that the creditor has no outstanding issues with you.

This is perfect as it means you’re making payments on time and they’re happy providing you with a service.

If you’ve been overusing your mobile phone tariff and are being charged extra but you missed a payment for 120 days, then it will be rated an O5 and will harm your credit rating.

If you continue to ignore this payment and you’re contacted by a collection agency, it could change to an O9 which will seriously harm your credit score.

In other words, lower numbers are always a good thing and the letter is only used to identify the type of credit on your report.

Your report should also show some additional information such as an account number if it’s your bank, or identifiers if it’s a mortgage product.

It will also show any lines of credit that were closed and should also explain the reason.

For instance, if you had a card that was stolen then it should list it on your report as well.

The importance of a good credit score

Maintaining a good credit score is important for many different reasons:


  • An easier time getting a mortgage for property such as a new home;
  • Far better interest rates that make it cheaper to take out a loan;
  • Less chance that your job offer could be rescinded due to poor credit;
  • Ability to take out emergency personal loans with fewer restrictions;
  • Able to rent a car without excessive credit checks;
  • Easier time applying for property rentals;
  • Larger credit card limits for purchases.


In short, it’s all about providing you with more financial freedom which makes future planning easier and coping with emergencies less stressful.

Maintaining a good credit score

There are a couple of simple steps that will help you maintain a good credit score.


  • Don’t apply for credit that you don’t need. If you keep applying for different sources of credit but don’t make use of them, it raises flags for lenders and they might decline your applications in the future.


  • Don’t max out your credit limits. Try and stay within 50% of your total credit limit because credit utilization is a huge consideration when it comes to calculating your credit score. Try and stay within 50% if possible.


  • Don’t be late with your payments. Regardless of what lines of credit you have, make sure your repayments come on time to ensure that you don’t drag your credit rating down.


By following these three simple steps, you can guarantee that your credit score remains stable and slowly increases, giving you more opportunities in the future to access different financial products.

Improving your credit score

If you’ve recently requested a credit report and have discovered that your score is rather low, then it’s a good idea to focus on strategies to improve your credit score.

Aside from following the three steps above to maintain your credit score, you should also look for ways to actively improve it so you can gain access to more credit products.


  • Analyze your budget to ensure you don’t fall behind on repayments. If you’re having trouble with your finances and are struggling to meet repayments, consider analyzing your budget and restructuring it to prioritize repayments.


  • Close accounts that you don’t use. If you have multiple credit accounts that are unused, make sure you close them so they don’t affect your credit rating with those entities.


  • Contact your lender if you’re facing financial troubles. If unfortunate circumstances have made it difficult for you to pay your bills on time, make sure you contact the lender before they reach out to you. Being proactive helps a lot when it comes to arranging for a repayment agreement that can avoid damage to your credit score.


  • Look for ways to build credit. People with poor credit scores usually gain access to high-interest credit options that may seem like a bad deal, but they’re crucial for building up your credit score. If you’ve been locked out of regular credit products, you have the option of building up your credit score with the help of these alternate financial products. As long as you can meet the repayments, you should utilize these services to improve your score.


  • Use your sources of credit. Idle sources of credit don’t help improve your score. Even if you can afford a purchase, using credit to purchase it and then paying back the credit, even with a bit of interest, is generally seen as a sure way to build up your credit rating over time.


We hope that this article has been informative.

Understanding your credit score and ratings is essential when it comes to maintaining good financial health and freedom.

We highly suggest that you take the time to study this article and request a credit report to find out where you stand in terms of credit health.

This will help a lot in the future when you decide to take out larger loans for personal or emergency reasons, or when you decide to invest in a new home.

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