Credit Score

We break down how your credit score actually affects the loans you apply for

By: Dominic Licorish on April 7, 2017
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Do you know your credit score?

Oh, you do? Well, have you ever stopped to think about what it actually means?

Credit scores are mysterious and even after a crash course in how they work, you’ll still be left in the dark about just how they actually impact your life. It’s difficult to understand credit scores because most people think they only have one. They have no idea that they actually have more.

There two major credit reporting agencies that calculate credit scores in Canada: TransUnion and Equifax. If you were to check your score with both companies after reading this, you’d get two different numbers and while they could be very close to one another, there could also be a large difference between them.

On top of those two, Equifax and TransUnion also calculate specific scores on behalf of lending companies. Any time you apply for a credit product lenders will check your credit and generate a score that is designed to predict how good of a borrower of that specific product you'll be.

That means that when you check your score, you're not even seeing the same number the banks and other lenders see when you're applying for something. Even so, knowing your credit score can be a useful way to know which products are right for you and if you need to build your credit rather than get that new loan.

650 — a good credit score?

Give or take, 650 is generally considered an average-to-good score by both TransUnion and Equifax. At 650, people will generally be approved for new credit products, although they are less likely to qualify for the best offers available.

For this reason, there’s a bigger difference between 600 and 700 than there is between 700 and 800 (which are on the upper end of good). Someone with 600 is a lot less likely to be approved for more credit than someone with a 700. 700 is good enough that for most people having a higher score won’t help them a whole lot, since there are other factors that lenders consider when reviewing applications beyond that. Even though 600 isn’t a terrible score, it’s definitely below where you want it to be if you want applications for products to get guaranteed approval.

How your credit score affects getting a mortgage

The credit score’s impact on mortgage rates is one of the most important considerations you will need to have when shopping for a mortgage. Generally speaking, having a higher rate will score you a lower interest rate on your mortgage. In fact, one may not get approved at all if they have a score under 620. Those people would need to co-sign everything with someone with better credit.

The difference between those with scores of more than 700 and those closer to 600 can be as much as a full percentage point or more in approved mortgage rate. Over the lifetime of a mortgage that difference adds up to tens of thousands of dollars. Meanwhile, the rate given to someone with a score of 800 will only be marginally better than someone with 700.

How your credit score affects getting a car loan

Just like with a mortgage, your score will dictate the interest rate you qualify for. Having a lower rate will help cut down the cost of the vehicle and may help in getting approved for special financing offers like $0 down or 0% interest on select terms.

Getting a car loan with bad credit can make a huge difference to your finances. Bad credit car loans often come with astronomically high rates of more than 20%. Over the lifetime of a car loan (which is getting longer all the time) a car loan at that rate would see you basically throwing a few thousand dollars or more down the drain every year. For this reason, if you can’t get approved financing by the dealer or your bank, you’re better off trying to raise your score to at least 620 or more. Maybe you won’t get the best rate, but you’ll be much better off than being stuck with paying one-fifth of the value of your loan every year to the lender.

How your credit score affects getting a credit card

Credit cards are generally offered to those with good credit or better. If you have bad credit, you can still qualify for a secured or guaranteed card, but the best credit cards are reserved for those with great credit and high incomes. These cards come with better features like higher rewards earnings, extended purchase protection and insurance, and other luxury perks such as access to VIP lines in airports.

For many of the best cards, a minimum income is often required. Even if you have a great credit score, you won’t qualify for these if you aren’t earning an above-average income. You will, however, be able to qualify for low interest cards that will help you save money and keep your score high even easier.

That’s about it

Generally speaking your credit score won’t affect other things in your life, although it sometimes can. Some jobs — usually those where you will have access to money — will check your credit when you apply for the position. Some landlords will require that a tenant have good credit. And in Alberta and Quebec, auto insurance companies can look at credit scores when determining auto insurance premiums.

Every lender determines what scores should qualify for which products. The best way to figure out where you stand for a particular product is to talk to a representative of the lender, tell them your score and ask if they think you’d qualify. It never hurts to ask, so good luck out there!