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Your credit scores are a metric that represents your creditworthiness to lenders and creditors. Whenever you apply for a loan, lenders will access your credit report to assess the likelihood that you will make timely payments. If you have a high credit score, lenders will usually be more than happy to approve your application. They may also reward you with a low-interest rate. Remember, credit scores are only one of the many factors that lenders consider when approving applications.

But suppose you have a low credit score. In that case, they may be hesitant to provide you with funds, as your poor crediting standing indicates you may be likely to honour your payment obligations.

Maintaining healthy credit scores is important if you’re in the market for a loan. But what if you lack a credit score entirely? What are the implications, and what should you do to get one?

How Do You Get A Zero Credit Score?

A zero credit score signifies the absence of credit history. Without a credit history, credit bureaus have no way to rate your credit profile and, as a result, assign you a credit score of zero. There are several reasons why you might lack a credit score:

Multiple Credit Bureaus

There are two credit bureaus in Canada, but not all lenders and creditors report to both. This means that one bureau may not have enough information on you to create a credit report and therefore a credit score. For example, It’s possible that you check your score via Equifax and find that it is zero, but if you checked via TransUnion, you may find you have a higher score.  

You’re New To Canada

If you’ve recently emigrated to Canada, you may not have had the opportunity to open a credit account or establish a significant payment history. While you may have had a credit score in your previous country of residence, that information has no bearing on your Canadian credit scores.

Learn how to build your credit history as a newcomer.

You’ve Never Used Credit

Unsurprisingly, your credit history is non-existent until you begin utilizing credit. If you’re young or have simply relied on cash to pay for all your purchases, there’s no record of past behaviour credit bureaus can use to assess your creditworthiness. Once you open a credit account and your credit information is reported to the credit bureaus, they will begin building a profile on you. 

You Haven’t Used Credit For A Long Time

If you’ve abstained from using credit products for a considerable time, your credit history can become stale and outdated. As a result, credit bureaus will lack sufficient and timely payment data to assign you a credit score. It’s wise to keep at least one account open at all times and use it occasionally. That way, the credit scoring algorithms have some data to work with to determine your credit scores.

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How Are Credit Scores Calculated In Canada?

Generally, you need at least 6 months of credit activity in order for the credit bureaus and other credit score providers to calculate your credit scores. Depending on the credit scoring model used, the way your credit score is calculated will vary. Below is a breakdown of the common factors most credit scoring models use: 

  • Payment history ~ 35%:
  • Use credit vs available credit ~ 30%
  • Length of credit history ~ 15%
  • Public records ~ 10%
  • Number of inquiries into the credit file ~ 10% 

Credit scores in Canada range between 300 and 900. Lenders usually consider any score below 650 a red flag. Borrowers who fall in this range may experience greater difficulty qualifying for credit products and access lower interest rates.

What’s Worse? Zero Credit Scores Or A Low Credit Scores?

Though you might be dismayed upon discovering that you have a zero credit score, it’s important to remember that it’s not equivalent to possessing a low credit score. 

Zero Credit Scores

Zero credit scores simply imply that you don’t have enough credit history to generate a credit score.  That you don’t have enough credit history for lenders to gauge your likelihood to pay your debt payments on time – it’s a neutral position.

However, without proof of your ability to manage debt, lenders will be hesitant to extend credit to you, viewing your lack of credit experience as a risk factor. 

Drawbacks Of Zero Credit Scores

  • Access To Products And Services – A zero credit score can hamper your ability to rent a place to live, obtain a credit card, or secure a low-interest rate on a loan. 
  • Higher Cost – Lenders may force you to put down higher down payments or deposits when borrowing large sums of money. 

Find out who else can check your credit report.

Low Credit Scores

Low credit scores are usually a result of late or missed payments, high credit utilization, debt sold to a collection agency or if you’ve gone through bankruptcy. With low credit scores, you’ll likely face similar problems as a person with a zero credit score, but it’s generally worse to have low credit scores. Low credit takes more time and effort to repair than it takes to build a solid credit history from scratch. 

Drawbacks Of Low Credit Scores

  • Hard To Qualify – A low credit score will limit your ability to access credit cards, obtain favourable rates on loans, and purchase expensive items, such as a home or car. You may also face difficulty acquiring a cell phone contract, securing employment, or getting approved for low insurance premiums.
  • Fewer Resources – Those with low credit scores may have fewer options than those who have zero credit scores. For example, new immigrants to Canada and students can take advantage of unique credit products that don’t require a credit history. Many large and established financial institutions offer banking and credit packages designed to cater to this demographic of borrowers. However, those with low credit scores will usually not have the privilege of qualifying for these products.

How Can You Build Credit When You Have Zero Credit?

Whether you’re new to Canada or a young adult looking to build a credit history from scratch, here are a few products that may help you work toward healthy credit scores.

Secured Credit Card

A secured credit card is a special type of credit card used by those seeking to build a credit profile. It functions like a regular credit card in that you can use it to make purchases. You’ll also be responsible for making payments by the due date, facing interest charges if you fail to do so. 

A secured credit card’s unique feature is that you must put up a cash deposit before the card issuer authorizes you to use it. This deposit functions as an incentive for you to use the credit card responsibly. The card issuer will refund your deposit once you pay off your balance in full and close the account. 

Secured credit cards are a great choice because they’re easy to qualify for and you can always upgrade to a regular credit card once you’ve built up some credit experience. 

Learn how to switch from a secured credit card to a regular credit card.

Secured Loan

A secured loan is backed by an asset you own, such as a car or home. If you own something that you can pledge as collateral, you’ll be able to gain access to loan products from lenders. If you abide by the terms and conditions of the loan contract and make regular payments, and your lender reports to at least on of the credit bureaus, over time you will start to build a credit history.

Secured loans are a good option as they’re relatively easy to qualify for. Lenders are willing to extend credit to individuals who back their promise to make payments with a personal asset. The asset reduces the lender’s risk, as they can liquidate it to make up the shortfall if the borrower defaults on the loan.

Credit Building Savings Loan

A credit building savings loan is a type of loan that helps you establish your credit and save money at the same time. Instead of a lender providing you with a sum of money upfront, you contribute regular payments over a specific time into an account. Essentially, you’re loaning money to yourself. 

As with regular loan payments, your lender will report your contributions to the credit bureaus, which may help you build a credit history over time. However, this isn’t always the case, so ensure you inquire with the lender about their policies. You don’t want to commit to a credit building savings loan if your payments aren’t being reported.

Consider A Co-Signer

You can obtain a loan or unsecured credit product with the help of a co-signer. An individual who co-signs a lending contract with you legally agrees to assume the responsibility for the debt and all associated fees if you’re unable to make payments. Most people use a family member or close friend as a co-signer.

Using a co-signer can help you qualify for a loan that you might otherwise not get approved for. As you make regular payments on the loan and they are reported to the credit bureaus, you’ll slowly build a credit history. However, keep in mind that your co-signer is on the hook for the balance should you default on the payments. If they run into issues settling the debt, their credit score can suffer as a result, which can strain your relationship with them.

Zero Credit Score FAQs

How much information do credit bureaus need to calculate my credit score?

You usually need a minimum of six months of credit activity for credit bureaus and other credit score providers to generate your credit scores. To avoid getting a zero credit score, try to maintain some level of activity in your credit accounts so that there is sufficient data to calculate your credit scores.

What’s more important, my payment history or credit utilization? 

Your payment history may be a more critical component of your credit scores than your credit utilization, as it typically accounts for about 35% of your credit scores. However, ultimately it depends on the credit scoring model used. Some may put more weight on your credit utilization while others may not. 

Why do I have a zero credit score with one credit bureau and not the other? 

It’s possible that you may have a zero credit score with one credit bureau and not the other. This can happen due to your lender or creditor not reporting your credit information to both credit bureaus. Moreover, if you only have one credit product and your lender is only reporting to one credit bureau, it’s possible that the other credit bureau has no information on you to generate your credit scores.

Bottom Line

Credit scores are a critical factor that lenders assess when they’re deciding whether to approve your application for a credit product. Without good credit scores, your options to access credit are severely limited. You may only be able to obtain high-interest loans with unfavourable terms. Or you may be rejected altogether.

Luckily, there are many ways for you to build your credit history from the ground up, and most of these methods don’t demand any special qualifications on your part. 

Mark Gregorski avatar on Loans Canada
Mark Gregorski

Mark is a writer who specializes in writing content for companies in the financial services industry. He has written articles about personal finance, mortgages, and real estate and is passionate about educating people on how to make smart financial decisions. Mark graduated from the Northern Alberta Institute of Technology with a degree in finance and has more than ten years' experience as an accountant. Outside of writing, he enjoys playing poker, going to the gym, composing music, and learning about digital marketing.

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