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Whether you owe money on your credit card, personal loan, line of credit, car loan or any other credit product, could potentially affect your credit scores. But how exactly does the money you owe affect your credit? 

What Are Credit Scores?

In Canada, there are two main credit bureaus, Equifax and TransUnion. They collect information about your credit activity which is reported by your lenders, creditors and other financial institutions.  This information is compiled into a file called a credit report. The information in your report is used to calculate your credit scores, which ranges from 300 to 900. Your credit scores are a tool used by lenders, creditors and other third parties to evaluate your likelihood to pay your bills on time. 

Canadian credit score ranges

How Are Credit Scores Calculated?

There are many different credit scoring models used to calculate a credit score, which may lead to you having multiple credit scores. However, there are a few common factors used to calculate a credit score: 

  • Payment History (~35%)
  • Amount of Debt You Carry (~30%)
  • Length of Credit History (~15%)
  • New Credit Inquiries (~10%)
  • Public Records (~10%)

How To Check Your Credit Scores In Canada? 

If you’d like to check your credit score, your can do so for free with Equifax by simply creating an account online. You can also get your credit score for free through TransUnion by subscribing to their credit monitoring service.

Or, you can choose a third-party provider that offers free credit scores in Canada:

 CostCredit ScoreCredit Report 
CompareHub logoFreeYesYesVisit Site
Borrowell logoFreeYesYesVisit Site
CreditKarma logoFreeYesYes-

Why Are Your Credit Scores Important?

There are a number of reasons why your credit scores are important.  

  • Credit Approval – Your credit scores often have a significant influence over your lender’s and creditor’s decision to lend you money.  
  • Interest Rates – Your credit scores can also influence the interest rate your lender charges you. Generally, the better your score, the lower your interest rates.  

Surprisingly, other people can see your credit report too. If you are looking for a new job or trying to rent an apartment, your credit could impact your ability to get either. 

  • To Get A Job –  You should know that employers can request your credit information and use it in their hiring decisions. However, this is not the case for all jobs in all industries.
  • To RentLandlords also request credit reports for potential tenants, using the information to predict whether you will pay your rent consistently. Insurance companies may also request access to your credit file before providing you with a policy.  

How Does The Money You Owe Affect Your Credit Scores? 

While using credit is a part of building credit, owing money can also negatively affect it. Find out how owning money on different accounts may affect your credit. 

How Does Owing Money On A Credit Card Account Affect Your Credit? 

Your debt-to-credit ratio usually accounts for around 30% of your credit scores. As such, the amount of debt you on your credit card can impact your credit scores. When it comes to using your credit card,  it’s recommended that you use no more than 30% of your available credit limit. 

For example, if you have several credit cards, with a total limit of $10,000, you want to try to use less than $3,000 at any given time. If you are regularly carrying a higher amount, it could have a negative impact on your scores.

Can Owing Money On A Credit Card Positively Affect Your Credit? 

On the other hand, debt can also be a good thing for your credit scores. If you owe money, but you are making your payments on time and adhering to the terms of your agreement, your credit scores may improve over time.

Can Paying Off Your Installment Loan Affect Your Credit? 

Yes, paying off your installment loan can both positively and negatively affect your credit in the following ways: 

  • Positively: Every on-time payment you make can help build your payment history, which generally accounts for 35% of your credit scores. 
  • Negatively: When you pay off a loan, that account closes, which can reduce your credit account age. This may negatively affect your credit scores given that it usually accounts for about 15% of your credit scores. 

Is It Better To Never Owe Money/ Use Credit? 

It seems a little counter-intuitive, since paying off debt is a good thing, but not using credit can also negatively affect your credit scores. The trick is to use your credit responsibly, paying at least the minimum payment and preferably the entire balance, whenever possible.

What Can You Do If You Have Debt That’s Negatively Affecting Your Credit Scores?

If your debt is having a negative impact on your credit scores, it doesn’t have to be that way forever. To help get your debt under control, you can, liquidate assets, increase your income, cut down on spending, and budget wisely. That way you’ll be able to put more money toward paying down your debt. 

If you have multiple debts, it’s best to start by paying off the one with the highest interest rate. When one account is paid off, take that money and put it toward the next account you plan to tackle. In this way, you can pay higher amounts off, as time goes on.

What If I Can’t Pay Off My Debt?

Sometimes, unfortunate circumstances occur. Whether you’re in debt due to unemployment, underemployment, or illness, or you’ve simply made some poor decisions and your debt has become unmanageable, there are options available to you.

Debt Consolidation Loan

If your income is sufficient and your credit is average or higher, you might be able to consolidate your debts. With a debt consolidation loan, you can combine several debts into one loan, reduce your interest rate, and hopeful lower your payments to an amount you can handle and pay off your debt faster. The purpose of a debt consolidation loan is qualify for a loan with a lower interest rate than what you currently have. If your finances and credit don’t afford you this option, a debt consolidation loan might not be right choice for you.

Debt Consolidation Program

If your credit score has been affected by high debt, you may not be able to obtain a consolidation loan. If this is the case, then a debt consolidation program (sometimes referred to a debt management program), might be a better option. When you enter a debt consolidation program, you’ll work with a credit counsellor who will contact your creditors and negotiate a payment plan that works for both parties involved. You’ll make payments to your counsellor who will then disperse the funds to the appropriate creditors. 

Debt Settlement Program

If you can’t afford to make your payments and you have accounts in collections, a debt settlement specialist can help you reduce your total debt load. The goal with debt a settlement is to come to an agreement with your creditors to pay them less than you actually owe. It’s important to work with qualified professional and watch out for debt settlement scams. 

Consumer Proposal

If you have a large debt, between $5000 and $250,000 and have assets you want to keep, a Licensed Insolvency Trustee may be able to negotiate a consumer proposal between you and your creditors. With this option, your debt is reduced, interest no longer applies, and creditors stop hassling you. Just keep in mind that a consumer proposal is a legal process. You will need to work closing with your LIT to make sure you stay on track and complete all the necessary steps. 


In the most challenging debt circumstances, claiming bankruptcy could be your best option. When you choose this option, you will work with an Licensed Insolvency Trustee. There will be no more creditors calling and actions against you, such as wage garnishments, and lawsuits will end. Most of your debt will be absolved and you will be able to start fresh.


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Debt And Credit FAQs

Does credit card debt hurt my credit scores?

The debt you carry, including your credit card balance, is one of the factors used when calculating a credit score. Maxing your credit card limit on a regular basis could potentially hurt your credit scores. Consider paying off your balance twice a month and see if that helps improve your scores.

I forgot to pay my phone bill, will that hurt my credit scores?

This depends on your service provider and how past due you are. If your service provider reports missed payments to a credit bureau, then not paying your bill could affect your credit scores. But, it also depends on how late you are. Service providers may not report late payments until they are at least 30 days late or even until they are 60 days late.

How much debt should I have to help my credit scores?

Responsibly managing debt that you can afford is what will help build your credit. Taking on too much debt just to build credit is never a good idea. Use your credit cards responsibly, don’t max them out, and always make your payments on time. If you need to take on more, for example, a car loan, make sure you can afford the payments and always make them on time. 

Rebuilding Your Credit

Once you’ve dealt with your debt, it’s time to begin rebuilding your credit and increasing that credit score. Start using credit, with limits you can manage, and pay it back as agreed. Fortunately, your credit score isn’t set in stone, and you can always take steps to improve it.

Shari Talbot avatar on Loans Canada
Shari Talbot

Shari is a Freelance Writer, specializing in personal finance, business blog content and education. She enjoys taking complex information and putting it into a form the average consumer can understand. When she is not working, she homeschools her children, supports her husband in business, and enjoys traveling with her family.

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