Your Credit Score: The Truth Behind It and Why It’s Important

Are you planning on borrowing money in the not-too-distant future for a major purchase, like a car or home? Before a lender extends you credit, they want to make sure you’re going to pay it back in full and on time. How do they do that? One way is by reviewing your credit score.

In fact, your credit score is a key factor that lenders consider before approving your credit application. By maintaining a good credit score, you’re more likely to get favourable loan terms, which can help you save money. Unfortunately, the reverse is also true.

If you’ve found yourself with a low credit score, you may feel worried about how it will impact your future. However, you’re not alone and there are several actions you can take to build or rebuild your credit score over time.

In this article we’ll examine some of the truths behind your credit rating, including what it means, why it’s important and what you can do to help improve it.

What is a Credit Score?

A credit score is a three-digit number assigned to you by the credit bureaus, which include Equifax and TransUnion. Credit bureaus use a mathematical formula to determine your score, taking into account all aspects of your credit report. Just like your grades in school, the higher your credit score, the better it is. A higher score increases your chances of getting approved for a loan and securing a lower interest rate.

Credit scores fall between 300 (being the lowest) and 900 (being the highest). You don’t have to have a perfect credit score though. A score of at least 680 is considered good by most lenders and can help you get the lowest interest rate.

Where Can You Find Your Credit Score?

There are two national credit bureaus in Canada – Equifax Canada and TransUnion – that provide credit reporting. Each company collects and researches consumer credit information and uses this data to rate your overall ability to pay back a debt. You can order your credit score directly from either company.

However, the credit bureaus are no longer the only place where you can obtain your credit report. A growing number of Canadian companies, such as Borrowell, Credit Karma, and Mogo, now provide access to your monthly credit score. Checking your credit score online is considered a “soft inquiry” and will not adversely affect your score.

What Does Your Credit Score Mean?

It’s important to know where you fall within Canada’s credit score range, so you’re informed about your credit profile. After you’ve received a copy of your credit score, here’s what the number means:

  • 780 and Higher: Congratulations, you have excellent credit! You will typically be approved for a loan and enjoy the best interest rates on the market.
  • 779 to 720: You have very good credit.  This is considered a near perfect score. You can still expect to have a variety of credit products and terms to choose from.
  • 719 to 680:  Lenders considered this a good score. You will generally have little to no trouble getting approved for new credit.
  • 679 to 620: You have fair credit. While this is still a good score range, you will be subject to slightly higher interest rates.
  • 619 to 580: Scores in this range indicate a high risk. You may find it difficult to obtain loans. And if approved, they will only be offered at higher interest rates.
  • 579 to 500:  With a score in this range, it’s rare you would get approved for anything.
  • 500 or Lower:  You’ll not typically get approved for new credit, especially unsecured credit, if your score is 500 or lower. Consider seeking help to improve your credit.

Now that you have a better understanding about credit scores, let’s take a look at the five key factors that impact your credit score and the weight that each one carries.

What Impacts Your Credit Score?

1. Your Payment History (35%)

Lenders are looking for borrowers who have a steady payment history. In fact, your payment history is the most important factor to lenders. Do you make payments on time, all the time? To be seen in a positive light by lenders, try to pay your bills on time and in full. Sometimes life happens and you can’t afford to pay the full amount. If that happens, at least make the minimum payment so that your credit account remains in good standing.

2. Your Available Credit, or Credit Utilization (30%)

The second most important factor after your payment history is your available credit. Your available credit is how much money you can borrow at any given time. You can figure out your available credit by taking your credit limit minus any balances that you’re carrying on your credit credits. Aim to use less than 35% of your available credit. If you use any more than that, it can negatively impact your credit score.

3. Your Credit History Length (15%)

Lenders also want to see that you have a long track record of using credit responsibly. They care about how long you’ve had credit accounts open. The longer you’ve had and used credit, the better. So, if you’re thinking about cutting up a credit card you haven’t used for a while, you might think twice, since it could actually lower your credit score. (Just be sure to use it every once in a while to avoid those pesky inactivity charges.)

4. Number of Credit Inquiries (10%)

Credit inquiries are made when lenders submit a request to obtain information on your credit. There are two kinds of credit inquiries: soft hits and hard hits. Soft hits, such as requesting your own credit report, don’t count towards your credit score, while hard hits, such as applying for a credit card or mortgage, do. Hard inquiries from creditors can negatively impact your credit score, particularly if your credit profile has received a lot of them within a short period of time. This leads lenders to believe you are in financial trouble and “credit shopping” to find a loan. Try to limit your number of credit applications, otherwise it could lower your credit score.

5. Credit Types or Variety (10%)

There are actually two types of credit products: Revolving (marked as R on your credit report), which is a different amount each month, and Installment (marked as I on your credit report), which is a regular set payment. Lenders prefer a mix of revolving and installment credit on your credit report because the two different types of credit show different behaviour. A positive payment history on an Installment product, like the Climb Accelerator Plan, shows you can use credit consistently. A positive history on a Revolving product, like a secured credit card, shows you can use credit responsibly. If you just have one type of credit, it can actually limit your score from reaching its highest potential.

How Often is Your Credit Score Updated?

Your credit score is recalculated on an ongoing basis. Normally your credit score is updated about once per month. But it can also happen anytime lenders report information to the credit bureaus, such as new or cancelled credit accounts, payments being made or missed or if a past collection has fallen off.

Why is Your Credit Score So Important?

Your credit score and underlying credit history are among the most vital parts of your financial life. Your credit score will follow you for many years, playing a huge role in many major financial decisions throughout your life.

Most people think that a credit score only really matters when it comes to applying for a loan, mortgage or credit card. Indeed, it can make all the difference in the amount of interest you’ll end up paying for the loan, or if will even get approved for the loan in the first place. But these days your credit score goes far beyond that. It can impact everything from the availability and cost of insurance, to job opportunities.

For instance:

  • Insurance Rates Whether you’re insuring your automobile, or purchasing tenant or homeowners insurance, your credit score may play a role in determining your premiums. In some provinces, insurers may review your credit score before issuing car or home insurance. They create what is called an “insurance score” thats largely based on your credit score. A poor credit score can cost you hundreds of dollars or more in additional premiums each year. A good credit score, on the other hand, can often qualify you for a discount on your premiums.
  • Employer Checks – Some employers are checking the credit profile of prospective new employees as part of their background investigation. Employers argue that credit history is effective in determining a candidate’s reliability and level of responsibility. It is true that there can be situations where a poor credit history may be due to something completely out of your control, such as a job loss or poor health. However, there’s a chance that a poor credit history could cost you a job.

Need Help Getting Your Credit Back on Track?

If you want to improve or rebuild your credit score, there are several options available to you. For instance, Climb’s Accelerator Plan is ideal for individuals who want a low-risk way of building their credit score, while also saving for the future.

Updated: March 30, 2020
Originally published: May 21, 2019

What’s a Consumer Proposal and How is it Different from Bankruptcy?

You may have heard the term consumer proposal. But do you understand what it truly means? And do you know how it’s different from a bankruptcy?

Both consumer proposals and bankruptcies help you get rid of debt and assist from a monthly cash flow perspective. However, the way they achieve these outcomes is very different.

In this blog post, we’ll take a look at exactly what a consumer proposal is, how a consumer proposal works and why you might benefit from filing for a consumer proposal over a bankruptcy.

What’s a Consumer Proposal and How Does it Work?

A consumer proposal is a formal arrangement that’s negotiated with the creditors to whom you owe money. This legally binding agreement is negotiated and administered by a Licensed Insolvency Trustee (LIT). A consumer proposal is another way to handle debt besides filing for bankruptcy. It protects you from creditors who are seeking immediate debt collection, sometimes via legal action.

When filing a consumer proposal, you should work with an experienced LIT you can trust. Together, the LIT will work closely with you to come up with a proposal your creditors are likely to accept. At its core, the consumer proposal can:

  • Pay your creditors a percentage of what’s owed to them;
  • Lengthen your payment schedule (to a maximum of 5 years); or
  • A combination of both.

When filing a consumer proposal, instead of paying creditors directly, you’ll make the payments through the LIT you’re working with. The LIT will then pay the creditors based on the agreed upon repayment schedule and amount in the consumer proposal.

Creditors will usually accept a consumer proposal if they believe they’re likely to receive more money than they would under a bankruptcy.

What are the Benefits of Filing a Consumer Proposal?

Are you considering filing for a consumer proposal or bankruptcy, but you’re not sure which one to go with? Here three key benefits of filing a consumer proposal over bankruptcy:

1. Avoiding Bankruptcy. 

A major benefit of filing a consumer proposal is that you’re not filing for bankruptcy. A consumer proposal offers you short term debt relief, plus a better opportunity to rebuild your credit score over the long term.

For instance, the debts included in your consumer proposal filing will be marked as “R7” or “I7” on your credit report. An R7 or I7 means that you have compromised or settled your debts and it remains on your credit bureau report for 3 years after your proposal is paid in full. Bankruptcies, on the other hand, result in your debts being marked as an “R9” or “I9”, which is the worst possible status on a credit report. An R9 or I9 represents a bad debt write off, meaning you defaulted on your debt. And an R9 or I9 will remain on your credit report for 7 years from the last date of any activity or payment on your outstanding debt.

2. Better Cash Flow. 

Since the amount of time you have to repay your debts may be extended – or the amount of money you’re required to repay may be reduced – your cash flow will almost always improve. Interest also stops accruing when you’re in consumer proposal, helping you save on the total amount of interest you’ll pay.

3. Keep Your Assets. 

One of the biggest concerns many people have when they file for bankruptcy is that they’ll lose the assets they’ve worked so hard to acquire. Unlike a bankruptcy, where you may have to turn over the keys to your home and car, a consumer proposal typically protects those assets from being seized by creditors.

What Happens Once You’re in a Consumer Proposal?

There are several things that will happen when you enter into a consumer proposal.

First, your LIT will file your proposal with the Office of the Superintendent of Bankruptcy (OSB). Once your proposal is filed, you stop making any further payments to your creditors. Any collection or legal actions initiated by your creditors (including collection calls, wage garnishes or court actions) will cease immediately.

Next, your LIT will submit the proposal on your behalf directly to your creditors. The proposal will include a detailed report about your personal situation, as well as the source of your financial difficulties. Your creditors will then have 45 days to either accept or reject the proposal. If they accept it, you will begin making payments according to the terms you have agreed to.

Can You Get Out of a Consumer Proposal Early?

Luckily, if you have the ability to, you can make additional payments towards your consumer proposal to pay it off earlier.

At Climb, we’ve designed a custom program, called the Climb Accelerator Plan, that provides the option for clients in consumer proposal pay if off earlier, while also building their credit score.

If you’ve recently filed a consumer proposal, our plan may be right for you. Learn more about the Climb Accelerator Plan today.

Updated: March 27, 2020
Originally Published: February 12, 2019

New for Climb Clients: Changing Your Payment Date

UPDATE: Climb has extended the free “Change Your Payment Date” option through to May 31, 2020.

Everyone’s lives have been affected by the coronavirus pandemic, and many people’s finances have already been hit hard by the economic impact. We understand the impact will only grow, posing even more of a challenge as our clients work hard to stick to their budgets.

That’s why we’re announcing a new option to Change Your Payment Date. From now until April 30 May 31, 2020, clients can contact us to reschedule their payment date to later in the payment cycle for free. Just make sure you get in touch at least two business days before your payment is due.

As long as you contact us at least two business days before your next payment, we’re happy to help however we can – our goal is to help you along your way, not hold you back with expensive NSF charges. You can learn more about to change your payment date in our Featured FAQs here.

Need more support during the coronavirus crisis?

Did you know that the Canadian Government has waived the one week waiting period and medical certificate requirement for EI sickness benefits if you’ve been quarantined due to COVID-19? This applies to self-employed Canadians, too. Learn more here.

Debt relief is available. The federal government has paused repayment of Canada Student Loan and Canada Apprentice Loans until at least September 2020 with no accrual of interest. The big six banks have all announced that mortgage deferrals are available – you just need to call your bank to get the ball rolling.

Other creditors are also willing to pause payments or restructure payment plans; the big telecom companies and several major utility companies have announced that they’ll make accommodations for people affected by COVID19. If you have a bill you know is going to be tough to afford in the coming months now is the time to call them, before you miss a payment or are hit with an NSF charge.

Don’t lose sight of what’s important. It’s easy to get overwhelmed as our lives are turned upside down. Do your best to stay focused on your goals and stay on top of immediate bills as best you can – even when that means reaching out to a creditor to ask about alternative options.

And most of all, remember there’s nothing more important than your health & safety. We’ve heard from the Office of the Superintendent of Bankruptcies that all Trustee sessions can be conducted via video conference. At Climb, we’re able to maintain our usual business hours and our team is fully operational in their home offices. This aligns with guidance from the Government of Canada and provincial public health agencies to minimize contact with others and maintain social distancing (minimum of 2 metres apart) when you’re outside your home.

These are trying times but working together, we will get past this. Isolation and social distancing is hard but it doesn’t mean you’re alone. Reach out to friends, family and loved ones through text messaging or a phone call – when we support each other it’s easier to stay strong.