What Factors Determine a Credit Score and Approval for Credit Cards in Canada?

You may have heard of the term credit score, but what exactly does that 3-digit number represent and how does it affect you getting approved for credit cards in Canada? How is that number calculated? What are some credit card options for those with low credit in Canada? In this post, we’ll cover everything you need to know about credit scores and credit cards in Canada.

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How Do Credit Scores Work in Canada?

Credit scores allow lenders to determine the potential risk of a borrower not paying back a credit card or loan. This score ranges from 300 to 900.

Typically, a score above 650 will allow you to easily qualify for a loan in Canada. While a score of 650 and under can bring difficulty in securing a loan, there are plenty of Canadian lenders who specialize in those with a low credit score.

According to one of Canada’s financial bureau’s, TransUnion, most Canadians will have a credit score between 620 and 679.

Credit Score Ranges in Canada

Credit scores are grouped into ranges:

Excellent (741-900): Canadians can obtain this score by having zero or very few late payments, regularly pay off all debt and outstanding balances, and having low credit utilization. The benefits of this credit score include fast approval for credit cards in Canada along with high credit and loan limits.

Good (690-740): This credit score means that you generally make most of your payments on time with an occasional late payment. Benefits for those with a good credit score are low credit card utilization and little difficulty in getting qualified for a loan.

Fair (660-689): This average range will still allow you to have multiple credit options; however, there might be higher interest rates. Typically, Canadians with this credit range were late making their payments to more than one lender, multiple times.

Below Average (575-659): The downfalls of having a credit score within this range include higher interest rate (meaning  you spend more money over the lifetime of a loan). You also might not be able to have credit cards in Canada that offer rewards or cash back.

Poor (300-574): Unfortunately, if your credit score falls within this range, you have severe credit damage. Whether that is from defaulting on loans or bankruptcy, these types of credit hits will stay on your credit report for several years. With this score, you may find it hard to receive credit or get approved for a loan.

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What Factors Influence Credit Scores in Canada?

While online credit companies have different formulas to calculate credit scores, the below factors will always be considered when determining eligibility for credit cards in Canada:

  • Payment history: This will account for about 35% of your credit score and is the most important factor. Why? Payment history shows lenders how likely you’ll pay back the loan by looking at your history with other lenders and banks.

In looking at payment history, potential lenders will see a detailed report of all your debts including which ones you’ve paid off, deferred, paid late, or were in collections. If you’ve previously filed bankruptcy that will also show up in this report.

  • Used credit vs. available credit (credit utilization): Accounting for 30%, lenders really look at how much you currently owe as this will impact your ability to manage more monthly payments. Even if you think you can handle a loan, you might not be able too especially if you’re close to maxing out on your credit. This will also make you a higher risk to lenders and reduce your chance of getting approved for credit cards in Canada.

  • Credit history: Ultimately, this factor comes down to time. Credit is built over years and can truly show an accurate picture of how financially responsible you have been historically. While lenders will typically look back 6-7 years (sometimes even longer), if you don’t have a long credit history, it may not necessarily reflect negatively on you. It simply means that you might have a lower score as you don’t have a big enough picture for lenders to see how you handle credit. In this case, a lower score is a conservative estimate to help protect lenders.

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In addition to length of time, diversity is also key. Lenders want to see how you handle multiple types of credit at once. The more diversity you have in your credit portfolio, the better. Lenders do understand that each person and situation is unique which is why credit history accounts for only 15% of your total credit score.

  • Credit inquiries or new credit applications: Every time you apply for a loan or credit, your score can take a “hit”, meaning that it will drop. Accounting for 10% of your credit score, credit inquiries will take a look at your credit accounts, recent new accounts, the time between opening new credit accounts, and seeing how often your credit has been checked in the last five years.

Additionally, frequently applying for credit cards in Canada and loans can be a warning flag to some lenders as it signals financial difficulty.

While these are some of the most popular factors that go into calculating your credit score, other factors that lenders consider include your income, assets, employment term length, and the reason why you’re applying for credit. Some lenders are even starting to look at Total Payment Ratio (TPR).

In assessing this, lenders are trying to determine how much you pay and your consistency in making certain payment amounts. You could be asked: do you pay the minimum balance or significantly above? Or do you pay your balance in full?

Calculating Credit Scores in Canada

Unfortunately, there is no easy formula for you to personally calculate your credit score. This is due to the fact that each credit bureau has a different equation for credit scores. While the above factors are most often used, from those, it’s recommended to really focus on having a long credit history with on-time payments, having the right diversity of credit (credit cards, mortgages, etc.), and making sure you don’t max out on credit.

In addition to going to a Canadian credit bureau, there are also online calculators you can use. If you do decide to go that route, be prepared to answer questions that ask about your total credit balance, total credit limit, missed payments, and credit applications within the last year. Once you hit submit, you’ll find a range in which your credit score will be in thus helping you to determine what credit cards in Canada you can apply and get approved for.

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What Is A Credit Report?

This report is a summary of your financial obligations based upon your past financial activity and spending habits. Lenders will use a credit report to verify your credit information, see a preview of your financial past, and review your repayment history.

Some of the information seen in your credit report will be used in determining your credit score and eligibility to get approved for credit cards in Canada which is why we recommend that you review this report a few times a year.

Checking Your Credit Report in Canada

Interested in personally reviewing your credit report? You can easily obtain a free copy through either Equifax Canada or TransUnion Canada. Simply answer a few identification questions and you’ll receive a hard copy in the mail in a few weeks. If you want to review your credit report before 2-3 weeks, you can go through either bureau and pay $20 for an online version.

We mentioned this before but since different credit bureaus use different factors to determine credit scores, we recommend getting reports from both of these companies for a more accurate assessment, as your score might differ between the two.

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What Low-Credit Credit Cards in Canada Should I Get?

low credit canada credit cards

One of most common forms of borrowing in Canada is a credit card. Luckily, there are a variety of credit cards in Canada out there that specialize in specific financial segments. Even if you have little to no credit, there is still hope. With these solutions, it’s important to keep in mind that you might have a lower limit and higher interest rates than most, but you can still get a credit card to help improve your credit.

Option #1: Secured Credit Cards

This type of card provides many benefits including being very easy to get approved for. Why? The financial institution has zero risk as it’s up to the cardholder to use their own money to pay for the deposit. All payments will be made on the cardholders credit report and most have a limit of $200 up to $5,000. Plus, there is a low annual fee between $10-$30.

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Option #2: Low-Interest Credit Cards

Typically these credit cards in Canada are offered by major credit unions, banks, finance companies, and online lending services. One of the sole reasons to get this type of credit card is due to low interest and perks such as gas rewards, cash back, and others. The limit is around $500 to $1,000.

If you decide to go this route, make sure that these payments are reflected by the major Canadian credit bureaus so you can reap the benefit of increasing your credit rating.

Option #3: Store Credit Cards

Yet another great credit card for those with little to no credit, these credit cards in Canada offer cardholders discounts, promos, and savings on bigger ticket items. Some can even come with a zero interest rate for a few months. The only downfall is these cards do see higher fees than both secured and regular credit cards.

Any one of these credit cards in Canada will give you an extra credit boost.

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How Can I Improve My Credit Score?

While tackling your credit situation might seem like a daunting task, we promise that it won’t take forever to improve your credit score so you can get approved for credit cards in Canada. Of course, time and living within your means are two big ways to increase your credit rating, but there are some other ways to help, too.

Tip #1: Pay Bills On-Time and Consistently

Late payments are the best way to bring down your credit score. Conversely, paying them on time for a long period of time can help to increase your score. To help ensure you make payments on time, we recommend that you set up automatic monthly payments (most credit cards in Canada will allow this). You can even set up these payments to process a few days before the deadline to guarantee that it’s processed in plenty of time.

Tip #2: Develop a Strategy to Pay Off Debts

Have you accumulated debt with credit cards in Canada? What about debt through various loans? Come up with a plan to help pay them off. Once you see those amounts decrease, you’ll start to see your credit score jump by 40-80 points within a month or two.

In paying off debts, make sure you don’t close any credit cards too soon as keeping paid-off credit cards open can actually help to keep your credit utilization low, thus improving your overall credit score.

Tip #3: Update Your Information and Correct Misleading Information

Reviewing your free credit report can notify you about any credit cards in Canada that are open in your name that shouldn’t be there. Additionally, you’ll be able to spot any information that isn’t correct and reach out to a credit bureau to get it rectified.

Sometimes you can find negative information that’s hurting your credit score. You’ll want to make sure that’s addressed sooner rather than later.

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The Importance of Credit Scores and Getting Approved for Credit Cards in Canada

Credit scores change quite frequently. Ultimately, it’s a good idea to have a general idea of what your credit score is by focusing on money management with a proper budget. Also, only applying for credit when needed is a smart idea. This will ensure your credit score will take care of itself with no need for extra worry on your end.

Do you have any questions about credit cards in Canada or ways to rebuild credit? The team at LendingArch is ready to help. Call us today at (877) 929-3208.

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