The terms credit score and credit rating are used almost interchangeably, but is there a difference? While the two terms are similar in nature and are often used interchangeably, they are actually two separate measures used by lenders to assess consumers’ creditworthiness and financial health. Read on for a breakdown of their differences.
Key Points
- Credit scores and credit ratings both reflect your creditworthiness, but they serve different purposes.
- A credit score is a 3-digit number that is calculated based on several factors, like your payment history and credit utilization.
- A credit rating is a combination of a number and a letter and is attributed to each individual credit account on your credit report.
Snapshot: Credit Score Vs Credit Rating
| Credit Score | Credit Rating | |
| What It Is | A 3-digit number that represents a person’s creditworthiness | A letter-based figure that represents how well a person manages their credit accounts, such as loans or credit cards |
| How It’s Represented | Numerical value ranging from 300 – 900 | Alphanumeric values ranging from R1 – R9 |
| Purpose | Credit scores are used to assess how likely a person is to repay borrowed money | Credit ratings are used to assess individual credit accounts rather than an overview of a person’s credit health |
| How It’s Calculated | Credit scores are calculated using numerous factors such as: -Payment history -Credit utilization -Length of credit history -Credit inquiries -Public records | Ratings are assigned based on the repayment on each account |
What Is A Credit Score?
A credit score is a numerical representation of your creditworthiness. It’s represented as a 3-digit number ranging from 300 to 900 and is calculated based on your credit history. Lenders use your credit score to assess the risk of lending you money.
What Factors Are Used To Calculate Your Credit Scores?
Your credit scores are calculated using multiple pieces of data taken from your credit report. It’s important to understand that both credit bureaus, as well as third-party score providers, all have their own credit score models. This means you may have different scores, depending on the source.
That being said, five main factors are used to calculate your credit score:
| Factor | Weight |
| Payment History | ~35% |
| Credit Utilization | ~30% |
| Length Of Credit History | ~15% |
| Public Records | ~10% |
| Credit Inquiries | ~10% |
1. Payment History (~35%)
Your payment history holds the most weight when it comes to calculating your credit score. If you have a consistent history of making payments on time, you would be perceived by lenders as less of a risk. Conversely, if you frequently make late payments, you would be perceived as a greater risk, and your credit score would be reflected accordingly.
Your payment history can include more detailed information, such as:
- How late the payments were made (ie. 30, 60, or 90 days late)
- Whether partial or full payments were made
- Total number of past-due payments
- Delinquent accounts
- The number of delinquent accounts to the total number of accounts you have
2. Credit Utilization (~30%)
Another factor taken into consideration during the calculation of your credit scores is how much credit you use compared to your available limit when it comes to credit cards and other forms of revolving credit. This is referred to as your credit utilization, or debt-to-credit ratio.
For instance, if your credit card limit is $10,000 and you’re carrying a $3,000 balance, your credit utilization ratio would be 30% ($3,000 ÷ $10,000). It’s recommended that you don’t exceed a credit utilization ratio of 30% to keep your credit score healthy.
3. Length Of Credit History (~15%)
This refers to how long your credit accounts have been open, or the average age of your credit accounts. A longer history is favourable, as someone with a lengthier history of on-time payments shows experience and responsibility when it comes to handling their credit. Conversely, it is difficult to judge someone’s creditworthiness if they have very little credit history.
4. Public Records (~10%)
Public records include things like bankruptcies, consumer proposals, accounts in collection, liens, and other derogatory public records. Each type of negative note will remain on your credit report for a certain amount of time before it falls off your report. Having these public records on your credit report may have severe negative effects on your credit scores.
5. Credit Inquires (~10%)
Every time a creditor or lender accesses your credit file, this request is noted on your credit report as a credit inquiry. This particular type of inquiry – often referred to as a “hard pull” or “hard check” – occurs when you apply for a loan or credit account. Hard credit checks can negatively impact your credit scores.
What Is A Credit Rating?
A credit rating on a credit report is a combination of a letter and a number that is assigned to each of your credit accounts. It represents how well you’ve managed your credit over time.
What Factors Are Used To Calculate Your Credit Rating?
The numerical value in a credit rating can range from 1 to 9, and the letter value can be either I, O, R, or M.
Type Of Credit
| I | Stands for “installment”, meaning that your loan is being repaid in fixed installments over a certain period of time, such as a personal loan or car loan. |
| O | Stands for “open”, meaning you have opened credit, such as a credit card bill that you pay at the end of the month. |
| R | Stands for “revolving”, meaning your credit payments are contingent on your account balance. This is the most common type of credit account among borrowers. A good example is a credit card. |
| M | Stands for “mortgage”, while not all mortgages show up on credit reports, if they do, they may be represented by an M. Mortgage may also be represented by an I for installment. |
Payment History
The number 1 represents all payments that are made on time, while 9 indicates that bills were never paid or that the account has gone bankrupt.
Credit Ratings:
The number and letter combinations can be any one of the following:
| R0 | Too little credit history, or credit unused. |
| R1 | Account paid within 30 days of the due date or one or fewer payments late. |
| R2 | Account paid more than 30 days past the due date, not more than 60 days late, or two or fewer payments late. |
| R3 | Account paid more than 60 days past the due date, not more than 90 days late, or three or fewer payments late. |
| R4 | Account paid more than 90 days past the due date, not more than 120 days late, or four or fewer payments late. |
| R5 | Account paid 120 days late or more but had not yet received an R9. |
| R6 | Not assigned a value. |
| R7 | Account holder is making agreed-upon payments through a debt relief program. |
| R8 | Repossession |
| R9 | Account in collections or bankruptcy. Account holder moved and did not provide a new address. |
Where To Find Your Credit Report And Credit Scores
You can access your credit report and credit score from a few resources:
Credit Bureaus
Both of Canada’s major credit bureaus, Equifax and TransUnion, provide credit reports and credit scores.
- Equifax – In Canada, Equifax provides Canadians access to their credit report and credit scores for free. You simply need to create an account online to access it. Equifax credit scores are updated once a month.
- TransUnion – TransUnion provides Canadians with their credit report for free. However, consumers must pay a monthly fee of $24.95 per month ($4.95 for the first month) to get their credit score. Residents in Quebec, however, can access their TransUnion credit score for free thanks to the Quebec Credit Assessment Agents Act (“CAAA” or “Act”).
Banks
Many banks, including CIBC, RBC, BMO Scotiabank and TD, provide their clients with access to their credit scores for free through their banking accounts.
Third-Party Providers
There are many companies in Canada that have partnered with one of the credit bureaus to provide their clients with access to their credit scores online. You can check your credit score and credit report for free with these providers, many of which are free.
| Cost | Credit Score | Credit Report | ||
 | Free | Yes | Yes | Visit Site |
 | Free | Yes | Yes | Visit Site |
 | Free | Yes | Yes | - |
How Does The Credit Reporting System Work?
As we mentioned earlier, the credit bureaus are the main sources for providing credit reports in Canada. Your credit scores are based on your credit report, which you may access upon request. The reporting companies also issue credit reports to lenders, insurers, and other organizations in order for them to evaluate your creditworthiness.
Here’s an example of how the system works:
You Apply For A Credit Card
When you apply for a new credit card, the credit card provider requests a copy of your credit report from one or both of the main credit bureaus. This is known as a credit check or credit inquiry. Note that you must provide consent before a creditor can check your credit.
The Lender Assesses Your Application
The lender may use your credit file and any other information you provide (such as income or debt information) to decide whether to approve your application and which interest rates to offer. If you have a low score and bad payment history, you may not get approved. However, if you have a good credit history, your chances of getting approved increase.
The Lender Makes A Decision
If you are granted a credit card, the creditor reports that account to the credit bureaus (either one or both). Your credit report will reflect how you manage this credit account (and any others you may have) going forward. This includes timely payments and late or missed payments.
Your Credit Profile Is Updated Accordingly
The credit bureaus revise and update your credit reports as they receive new information from creditors and lenders. They’ll also consistently update your credit report every 30 days or so. The updated information includes your balance and payment activity. The next time you apply for a credit card or other credit product, the process repeats itself.
Credit Myths And Misconceptions – True Or False?
There are countless myths and misconceptions found online about credit that you can’t always trust. Relying on this incorrect information and letting it guide your decision process can be very dangerous for you and your credit.
Some of the most common errors include, but aren’t limited to:
Myth #1: Your credit scores drop if you check your own credit report.
False. It’s recommended that you review your credit report annually. This type of credit check is considered a “soft” inquiry and will not negatively affect your credit score.
Myth #2: It’s good for your credit to close your old accounts.
False. A longer history is advantageous and seen as less risky. Closing old accounts will make your credit history look shorter, which is not attractive to lenders.
Myth #3: Paying off an account in bad standing removes the record from your credit report.
False. Negative records, such as late payments, will stay on your credit report for up to 7 years. Once an account is paid, it isn’t deleted from your credit report. Instead, it is simply listed as “paid.”
Myth #4: Cosigning means you’re responsible for the account.
True. Opening a joint account or co-signing a loan implies you will be held legally responsible for said account. All activities and transactions on the joint account are shown on the credit reports for both people involved.
Final Thoughts
For the average Canadian consumer, checking your credit and understanding what affects your credit scores is an important part of a healthy financial life. If you’re going to request a free copy of your credit report from one or both of the credit bureaus, understanding the rating system can make the process more educational.
