What Makes a Credit Score Good?

What Makes a Credit Score Good?

Written by Caitlin Wood
Last Updated November 30, 2021

Everyone knows that a good credit score is important and that a bad one can negatively affect your life, both personally and financially, but do you know everything that you should about your credit score? Do you understand all the factors that affect your credit score? And finally what makes a credit score good? You’re not alone if you don’t know everything you should about your credit score, below we’ve compiled everything you need to know about your credit score.

First, let’s look at the most common ways a credit score affects your everyday life so that you can better understand why having a good credit score and good credit history is so important.

How Can a Low Credit Score Affect my Daily Life?

Your credit score is used by countless people including potential employers, your landlord, banks, lenders, and insurance companies to evaluate your credit creditworthiness. This means that your credit score is directly related to your ability to get approved for a loan, or new credit, and even a new job or apartment.

Applying for a Job

Having bad credit could prevent you from getting a job. They might see a bad credit score as a sign of irresponsibility and therefore might choose to hire someone else. Remember that a potential employer is required to ask you to authorize a credit check.

Applying for a Loan

Your credit score plays a big role when a bank or loan agency is deciding whether or not they want to approve you for more credit. Not only will your credit score affect whether you get the new credit it will affect how much credit you get and the interest rate. If you are considered a credit risk because your credit score is low, then you could potentially get offered a lower credit limit with a higher interest rate.

Renting a Vehicle

Although renting a car is not the same as applying for new credit when you sign their application papers you are allowing them to check your credit information. The reason they check this is because they need to know what kind of risk they are taking before they loan you their property. If you have a low credit score you might be seen as high risk and will not be lent a car.

Rental Housing

A potential landlord will also need to check your credit history as they need to assess whether you are a credit risk. A bad credit score may show them that you can’t be trusted to pay your rent on time and therefore they might rent to someone who is less of a risk.

Canadian Credit Score Ranges

For more information on credit score ranges in Canada, check out this article.

Understanding your credit score

In Canada, the range of a credit score is 300, which is the score you have when you first start to build one, to 900, which is the highest you can have. TransUnion a Canadian company that provides credit information to individuals and companies explains that 650 is the point in which you start to have a ‘good’ credit score. What this means is that a credit score over 650 can allow you to qualify for a loan without any trouble, but a credit score under 650 will make it more difficult for you to qualify for a new loan.

Having a credit card is a great way to establish a credit score, but you must be responsible with it because while it is a good tool to help build your credit score, it can also greatly decrease your credit score.

Your credit score represents a single moment in time and can change based on your credit behaviour. Everyone makes mistakes and the misuse of loans and credits cards is very common. The good news is that anyone can improve their credit score, it simply takes time and some effort. One of the most efficient ways to build your credit score is to make consistent on-time payments. Late or missed payments or several maxed out credit cards will lower your score so always make your payments on time. Another great way to improve your credit score is to pay down any debt you might have. Your credit utilization, the amount of debt you have compared to your available credit limit, should always be under 35%. So if you’re currently carrying around a large amount of debt, work toward paying it off and you should see an improvement.

Don’t focus on the number too much as your exact credit score will be slightly different based on who is looking at it. The number that you will see once you have ordered your report is based on a different set of calculations for consumers. Furthermore, each creditor has its own set of rules and calculations that it applies to your credit to find your score. But don’t worry your score will still be in the same range.

Finally, the actual number of your credit score is only one of the many things creditors look at when determining your credit risk and worthiness.

Repayment History

While generally speaking a credit score of 650 is ‘good’ and can qualify you for new credit or a standard loan, there is more to a credit report than your credit score. You could potentially have a credit score significantly higher than 650 and still be turned down for a mortgage or whatever new credit you are applying for. The main factor that lenders and banks are looking for when they decide whether or not you’re a credit risk is repayment history.

Lenders want to see that you not only have two or more forms of credit but that you are able to keep up with the payments. Having credit is one thing but using it properly is another, always making payments on time is extremely important. Lenders also want to see at least 1 or 2 years’ worth of good credit behaviour. So if you want to apply for a mortgage within the next couple of years you need to start working on your credit score right away.

For more information on credit scores, check out our learning center.

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Caitlin is a graduate of Dawson College and Concordia University and has been working in the personal finance industry for over eight years. She believes that education and knowledge are the two most important factors in the creation of healthy financial habits. She also believes that openly discussing money and credit, and the responsibilities that come with them can lead to better decisions and a greater sense of financial security. One of the main ways she’s built good financial habits is by budgeting and tracking her spending through the YNAB budgeting app. She also automates her savings so she never forgets to put aside a portion of her income into her TFSA. She believes investing and passive income is key to earning financial freedom. She also uses her Aeroplan TD credit card to collect Aeroplan points so that she can save money when she travels.

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