A good credit score is crucial to your financial well-being and success. But many young people and newcomers to Canada may be unfamiliar with the concept of a credit score and why it matters.

Here is some basic information about what a credit score is, how it works, and how you can build and maintain a high credit score in the future.

What is a credit score?

Simply put, your credit score is a numerical representation of your spending history. It reflects important elements of your credit report, such as your payment and credit history, the amount of credit you have used, and whether you have paid your bills in full and on time.

Your credit score is a three-digit number calculated by Canada’s two main credit bureaus, Equifax and TransUnion, to assess your creditworthiness. The higher your score, the more likely you are to be approved for credit, loans, and other financial aspects of life, such as renting an apartment.

What is a good credit score in Canada?

In Canada, credit scores range from 300 to 900, with 900 being the highest. A credit score between 740 and 799 is considered very good, while 800 and above is considered excellent.

Why is it important to have a good credit score?

A good credit score shows that you are likely to manage your finances well and pay your bills on time. Banks, credit card providers, and car dealers look at your credit score to determine whether they are willing to lend you money, how much they will lend you, and at what interest rate. Before deciding whether to rent you an apartment or house, landlords may ask you to take a “credit check” to make sure you pay your bills on time. With your consent, some employers may also request a credit check before deciding whether to hire you.

A high credit score is not only a potential factor in determining whether you are eligible for a mortgage, personal loan, line of credit, or credit card, but it can also provide you with a number of nice benefits. For example, it can allow you to negotiate more favorable terms, such as lower interest rates on borrowed money, higher credit limits on credit cards, and even savings on your cell phone plan.

How can you improve your credit score?

If your credit score is lower than you would like, there are a few simple steps you can take to improve it.

Build your credit history

The surest way to improve your credit score is to maintain a good credit history, and many factors influence this. Every time you borrow money from a credit institution or pay a bill, information about your credit usage, repayment history, late payments, and outstanding balance is reported to credit bureaus over time. All of this data makes up your credit history.

Eliminate factors that negatively affect your credit history

An easy way to improve your credit history is to pay your bills on time every month. Even if you cannot pay off the debt in full, paying at least the minimum payment on time in each payment cycle will help you achieve stable payments. Over time, these habits will result in a higher credit rating.

Pay attention to your credit utilization ratio

You should also pay attention to what percentage of your available credit limit you use in each payment cycle. This is called your credit utilization ratio, and overusing it can negatively affect your credit score. Ideally, your utilization should not exceed 35 percent of your total credit limit across all credit products. For example, if your credit card limit is $3,000, try to spend less than $1,050 per billing cycle.

Practice maintaining a good credit score

Maintain a good credit score by knowing the factors that affect it and applying that knowledge. These include a reliable payment history and low credit utilization ratio, as well as diversifying your credit portfolio (credit card, car loan, mortgage) and limiting the number of credit checks (hard inquiries) performed by lenders on your account. Hard inquiries are only performed when you apply for additional credit. Minimizing these inquiries can help improve your credit score.

What to do if you don’t have a credit history

If you don’t have a credit history yet, you can start by applying for a credit card and using it responsibly. This means paying your bill on time every month, keeping your debt to a minimum, and maintaining a reasonable credit utilization ratio. This will be important later in life when you want to rent an apartment or buy a new car, for example.

Newcomers to Canada usually cannot transfer their credit history from one country to another, so they have to start building their Canadian credit history from scratch. You can start by applying for a Canadian credit card and, again, using it wisely. With time, patience, and good credit habits, you can build a solid credit history that will improve your credit score as you become more established in Canada.

Why do your credit scores change?

Credit scores can change over time depending on your financial activity. This is normal. The longer you have credit, the more information a lender can obtain. Over time, a good payment history and low credit utilization can increase your credit score, while missed or late payments can decrease your score.

Your credit score can affect many aspects of your life — your finances, employment, and even your housing. It is important to maintain a good credit score, as it will open up many financial opportunities that will contribute to your overall well-being. Take care of your credit score, and it will take care of you.