Credit scores are an important factor in determining your creditworthiness and can have a significant impact on your financial life.
As such, many Canadians have been flocking toward free third-party credit score services, like Compare Hub and others. These services allow Canadians unlimited access to their credit scores, to help them keep better track of their credit. But are credit scores really that important?
In fact, some people believe credit scores are a scam, but is it true?
What Are Credit Scores?
A credit score is a 3-digit number that can range anywhere from 300 to 900. Good to excellent credit scores fall between 660 to 900 while bad credit scores fall between 300 to 559. Everything in between is considered fair credit.
Credit scores can impact your ability to not only access different credit products but also rent an apartment, or get a job. Lenders and other third parties will use it to determine the likelihood that you’ll pay your bills or debts on time.
| What is a FICO score? The FICO score is a credit score that is used by most lenders in Canada. It was previously known as the beacon score. FICO scores are only accessible to lenders, consumers have no way of accessing it themselves. |
How Are Credit Scores Calculated?
Your credit scores are calculated based on the information in your credit report. When lenders pull your report, the score they get will differ from what you see as the credit bureaus have developed multiple credit scoring models that they sell to the lenders. Depending on the credit scoring model used the credit score they see may differ from the one you see.
However, in general, there are five common factors used by most credit scoring models. The main difference is the weight attributed to each factor. For example, one credit scoring model may put more weight on the number of credit inquiries over your credit account age.
- Payment History (~35%)
- Debt-To-Income Ratio (~30%)
- Credit History (~15%)
- Credit Inquiries (~10%)
- Public Records (~10%)
| Why Do You Have Multiple Credit Scores In Canada? In Canada, you can have multiple credit scores, all of which may vary. In fact, there is no limit on how many credit scores you can have and they can vary due to a number of factors including: Different Credit Scoring Models – Every credit bureau, lender, and credit scoring company may place more importance on one factor than another. This causes credit scores to vary from the ones you see with the credit bureaus. Different Credit Reports – Not every lender reports your credit information to both credit bureaus. In fact, some may only report to one credit bureau, while others may not report to either one. The discrepancy between the two credit reports can also cause your credit score calculations to vary. |
Are Credit Scores A Scam?
No credit scores are not a scam, however, there are certain things that may make credit scores seem unfair:
No Action Can Guarantee Improvement
While good credit usage will eventually lead to good credit, there’s no particular action that will guarantee an increase in your credit scores. For example, paying your bills on time may help your credit scores, but the exact impact it has will vary by each individual. For some, they may see an immediate increase, while others may see no change.
It’s A Catch-22
Credit scores are a classic example of a Catch-22. In order to get good credit, you need to use credit, but in order to access credit, you need good credit. This paradox makes it incredibly frustrating for individuals as they may have the income and financial resources to comfortably afford a loan. Yet, they may be rejected or get stuck with high-interest rates and poor terms due to their credit scores.
Where Can You Get Free Credit Scores?
In Canada, you can get your credit score and report from both credit bureaus in Canada. Equifax provides a credit score (and credit report) for free to any consumer. Transunion offers a consumer disclosure (which is a type of credit report) for free to all Canadians. In Quebec, Transunion also offers a free credit score with the consumer disclosure.
You can also get your free credit score from third-party websites.
| Cost | Credit Score | Credit Report | ||
 | Free | Yes | Yes | Visit Site |
 | Free | Yes | Yes | Visit Site |
 | Free | Yes | Yes | - |
Are Free Credit Scores Accurate?
While there are many free credit score services available, plenty of people are skeptical about whether or not they are accurate or even useful. Here’s what you should know about free credit services in Canada:
The Credit Scores You See Is Not The Same As The One Your Lender Sees
The credit score you see through third-party credit score services may not be the same as the one your creditors or lenders will see. While many of these service providers have partnered up with Equifax or TransUnion, the credit scores that they provide are based on their own credit scoring model.
An exception to this is Compare Hub, which provides the Equifax score and lets you see your Equifax credit report.
Similarly, many creditors and lenders have their own credit scoring model, and as such may calculate your credit scores differently than the third-party credit scoring providers. Due to the variety of ways a credit score can be calculated, the score you see is generally not the same as the one your lender sees.
That being said, these services are still quite accurate and can provide you with a good understanding of where your credit stands.
Your “Free” Credit Score is Not Your “FICO” Credit Score
As we explained above, there are several versions of your credit score. These “free” services provide one type of score, sometimes referred to as a “client” credit score. But, lenders and creditors check something called a FICO score (previously known as a beacon credit score).
Here’s the biggest difference; your FICO credit score is only available to businesses, not to individuals or consumers.
So, when you pull your client score from a free or low-cost credit monitoring service (including a credit bureau), it may be higher or lower than the one that a lender or creditor would see if they pulled your credit.
Are Free Credit Score Providers Actually Free?
Although your client credit score is technically “free” through one of these services, you may be paying the provider in indirect ways.
They Use Your Credit Data For Marketing Purposes
Your personal and financial information can be quite valuable because it makes it easier for them to market other products and lenders to you based on your profile.
Essentially, you’re giving free credit score providers permission to access your official credit report and credit score. They can then use your information to send you marketing materials, loan offers, credit card offers, etc.
They Get You With Other Offers
While some may actually recommend good products that can help you, they may simply push products that will earn them more money. For example, you may be shown offers from service providers with very few requirements. These offers can be particularly appealing if you’ve had trouble getting approved for credit in the past. Of course, the products come with high rates and fees.
Typically, the products that they predict will earn the best returns are pushed upon clients to compensate for the lack of profit that comes from their free credit score service.
They’re Only Free Temporarily
Some “free” credit score providers offer a free trial. Once the trial ends, you’ll have to pay a monthly subscription for the service. Moreover, if you want to cancel, you’ll often have to go through an annoying cancellation process.
Should You Check Your Credit Report?
Yes, and you should check it regularly.
Your credit scores are calculated using the information in your credit report. As such, checking your credit report for inaccuracies, credit fraud, and identity theft is important. It can help you identify potential factors that may be negatively affecting your credit scores.
Should You Improve Your Credit Score Before Applying For A Loan?
If you don’t urgently need a loan, it’s recommended that you try and improve your credit scores before applying with any lender. This could help you from having to rely on high-cost loans like payday loans and auto title loans.
Similarly, improving your credit can lead to better lean terms including lower interest rates.
Bottom Line
Free credit score providers are not trying to take advantage of you, they are simply offering a service that comes with a few conditions, as most services and products do. While they allow you to look at their version of your credit score for free, they may also use your information to market different products toward you to gain your business.
