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How Credit Scores Work in Canada
The Bureaus
I've talked to a few people recently about my experience at the bank, both as a former employee, and as a customer.  The credit score is a mythical creature that, to be frank, even the front-end staff at banks don't really understand.  Hopefully, this will help you understand the system, and more importantly, how to optimize your ability to obtain credit and low interest rates.
Banks and other lenders employ various scoring systems and calculations to decide how risky it is to give you money, or goods in lieu of money.  The outcome of this analysis determines the eligibility, type, amount, and interest rate of any proposed credit.  You can break this analysis down into 2 categories:  external scoring, and internal assessments.
External scoring has been somewhat standardized in the US, and more so in Canada.  In the US, there are three private companies that maintain credit files: Equifax, Experian and TransUnion.  In Canada, only Equifax and TransUnion remain, as Experian no longer operates here.  There are other companies that provide credit scores, but these two are the nationally recognized and official credit bureaus.
Equifax and TransUnion utilize the FICO score in Canada.  The FICO score was developed by a corporation (Fair Isaac Corporation) in the 50s as a way of calculating risk.  In the US, FICO scores range from 300 to 850.  In Canada, Equifax uses a 300 to 900 range.  These are arbitrary numbers, and could have easily been 0 to 600, for example.  The higher the number, the lower a financial risk you are to lenders, according to the scoring system.   Here is a breakdown of Canadian FICO scores, as provided by Equifax:
300-549: 4%
550-599: 4%
600-649: 6%
650-699: 11%
700-749: 19%
750-799: 27%
800-849: 24%
850-900: 5%
As you can see, the majority of Canadians have fairly good FICO scores.  Lenders tend to increase interest rates or decline credit to those under 600.  Those above 700 tend to get the better interest rates and higher credit limits.
So, how does this work?  How do Equifax and TransUnion get my information, formulate my score, and then what do the lenders do with this information?
The credit bureaus rely on the lenders for credit file information.  For example, when you apply for a credit card, and they ask for your employer information, your address, and your SIN number or birth date, this is all passed on to the credit bureaus and your file is updated.  Lenders also send credit bureaus things like:
Account Numbers
Credit Limits
Minimum Payment Amounts
Type of Credit
Amount Past Due
Any Late Payments
This information is recorded on your credit file at the bureau, and is kept on file for at least six years.  Closed or dormant accounts are removed after 6 years of the last noted activity.   This is why a bankruptcy can take 7 years to recover from; 6 years on file and another year to build up your score again to acceptable levels.
That is what IS sent to the bureaus.  What ISN’T sent, is information like:
Payments made over and above the minimum payment.
Double payments made to compensate for a late payment.
Positive rewards for paying out credit early.
So, what we can learn from this is that you should never miss a minimum payment, or it will stay with you for 6 years.  In tight financial times, it is better to make all of your minimum payments than it is to miss one and pay more on another.  Late payments are recorded into 3 categories: 30 day, 60 day, and 90 day / 90 day plus.  If you miss a payment, it immediately marks you once in the 30 day category, and that stays for 6 years at a minimum.  If that payment is then delayed a second time, your 30 day mark stays and a 60 day mark is added; the same occurs for the 90 day category.  Payments missed after 90 days don’t garner more bad marks, but will eventually be sent to collections.  Collections are reported to your credit file, and have detrimental effects on your score, similar to bankruptcy.  They also remain for 6 years.  I hope I’ve impressed that yesterday was the last day you have ever missed a MINIMUM payment.  The more recent the late payment was recorded, the more weight is carries in your score calculation.  I’ll wait while you make a few online banking payments……………………… Ok.  Let’s move on.
Now that you know how information is gathered for your credit file at the bureaus, let’s look at how your FICO score is calculated.  The score itself is a complex mathematical equation that takes into account almost all aspects of your credit file, including the length of time you have been active.  Here is a general breakdown of your credit file and its effect on your FICO score, in order of importance.
Payment History: 35%
Debt Ratio: 30%
Credit History Duration: 15%
Credit Report Inquiries / Hits: 10%
Types of Credit / Mix: 10%
Your payment history accounts for 35%, the majority of your score.  It is based mostly on the 30, 60 and 90 days records of late payments.  I think we covered this already, but it’s important to impress how critical this is to your score.  A bad payment history will override all other aspects, dragging your score down.  Collections and Bankruptcy also affect this.
Your debt ratio reveals something interesting.  This is a calculation of how much credit is available to you (all of your credit limits added up) compared to how much you currently owe.  One might think that by reducing your credit card limit, you would look responsible.  However, maintaining a large limit and a small balance has a positive effect on this part of your score.  Keep in mind though, that lenders also do an internal assessment and will count the high credit limits as a liability.  So, in the end it is a tight balance between a responsible usage of credit limits and the risk of carrying them.  This portion of the FICO score shows best when you owe 30% or less than your credit limits.
The credit history duration calculation is meant to assess the accuracy of your credit file as a representation of your risk level.  Think of this as a statistics function; the larger the sample size, the more authority the results have.  So, the longer you keep accounts open, the higher this portion of the score will be.
Credit report inquiries are a bit mysterious, in that the exact way they are calculated is not obvious.  However, as a rule, the fewer credit report inquiries that the bureaus receive in the last 12 months, the higher this portion of your score will be.  This is because risky borrowers tend to need credit often due to poor financial planning.  This is also why young people tend to hit a wall when starting out in life.  Shopping around for a car, student loan, credit card, mortgage, and all the early-life stuff really starts to add up in credit report inquiries.  Equifax claims that their system attempts to detect rate-shopping (allowing multiple companies to check your credit score for the same credit product), and claim that only one inquiry will count in the calculation.  However, I am not convinced about this.  When I applied for a mortgage at one bank, there were 5 total credit inquiries (bank, CMHC, bank, etc.).  When my wife leased her car, there were 2 inquiries; one from the dealer, and a separate one from the lease finance company.  In short, don’t apply for credit unless you need it.  Don’t authorize a credit check unless you need it.  Finally, while rate-shopping, try not getting a credit check until you are reasonably certain that you will be getting credit from the lender.
Finally, your credit mixture is measured.  This is meant to show that you can be responsible enough to have not only revolving debt, like a credit card, but installment debts, as in a loan.  You can’t really be expected to do much to improve this score, other than using credit wisely.  By this, I mean that if you have long term debts, you should have them in installment loans.  Short term debts, as in credit cards, should be used for month to month purchases if possible.  If you stick to this rule, you will naturally develop a diverse portfolio of credit products.
Well, that’s how your FICO score is calculated; nothing more, nothing less.  Since payment history and debt ratio have the largest impact on your score, I would recommend you focus on those 2 aspects if you want to raise your score, or keep it high. Now you know how your score is formulated.  So what do lenders do with this information?
Lenders receive your credit report along with your FICO scores from both TransUnion and/or Equifax.  They are then able to view information from your credit files to get a more subjective picture of your credit history.  They can see things that the score itself doesn’t show, such as: if you have unsecured or secured debt, if you have joint accounts (co-signed accounts), or even just how many accounts you have open.  They can also see what your total reported available credit limit is.  This, among other things, allows them to do an assessment, commonly referred to as the debt to service ratio, or income to debt ratio.  Lenders have their own internal requirements and scoring systems based on these ratios and other data.   These are their internal assessments; the other part of the equation, next to your FICO scores.
Internal assessments usually take into account your theoretical maximum monthly minimum payment amounts, combined with your monthly housing costs.  This gives lenders an idea of what you could be spending if you maxed-out all of your available debt, and intended to keep living as you do now.  For example:
Mortgage / taxes / insurance: $1500/month
Heating Average: $100/month
Credit cards - $5000 limit, currently owing $100.  Maximum is still $5000, and a minimum payment at that balance would likely around: $125 /month
Car payment: $300/month
Loan: $200/month
Home Depot Card - $1000 limit, nothing owing: $25/month
TOTAL MONTHLY PAYMENTS: $2250
Lenders can then use the calculated monthly payment, or debt, as a part of your debt/income ratio.  Let’s assume in this example that your gross income per month is $3500, your ratio would be:
$2250 debt : $3500 income OR 64%
Most banks prefer you to be at or below 35%.  This is because the rest of the money is presumably used for clothing, food, travel, savings, emergencies, etc.  Different lenders have different target values, but this example is fairly accurate representation of the process.
As you can see, even with a stellar credit score, a lender may deny you credit based on your debt to income ratio.  Keep in mind that joint accounts assume that both people are responsible for the full amount.  So, if you are asked to cosign for a loan, keep in mind both your FICO score and your debt to income ratio will be affected the same as it would if you were the sole account holder.  In fact, this is a good place to mention that in a joint or cosigned account, late payments are recorded equally on both credit files.  Time to go buy dad a beer to thank him for that car loan he helped you get.
The internal assessment portion of the lending process can be the most frustrating.  The FICO scores are for the most part very objective.  The internal assessments that banks and other lenders make, can introduce a high level of subjectivity and nuance.  It is best to shop around and find a “banker with a brain” to work with, and stick with them.  Best of luck with that!


Equifax Canada
https://www.econsumer.equifax.ca
You can request your credit file and/or FICO score here.

Trans Union
http://www.transunion.ca/
Canada's other credit bureau.  You can obtain their credit file and score as well.


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