How to protect, improve your credit score amid cost-of-living pressures

File – Credit cards as seen July 1, 2021, in Orlando, Fla. A low credit score can hurt your ability to take out a loan, secure a good interest rate, or increase a credit card spending limit.

Last month, the federal government proposed tying rent payments to credit scores, a new way to help Canadians build their credit.

Meanwhile, cost-of-living pressures are impacting some people’s ability to pay down debt and keep their scores in good standing.

A credit score is a three-digit number that comes from your credit report — a summary of your history that’s created when you borrow money or apply for credit for the first time.

The score and report is used by lenders or banks to determine whether it would be risky to loan you money for a car or a mortgage, or even if you’ll make rent payments on time.

“It’s a behavioural prediction of the likelihood that the individual will make their bill payments on time,” Julie Kuzmic, Equifax Canada’s senior compliance officer, consumer advocacy, told Global News.

Equifax and TransUnion are the two credit bureaus which collect, store and share information about how you use your credit.

There are five factors that determine a credit score: payment history, credit history, the mix of credit you have (such as car loan, credit card, mortgage), new credit inquiries, and your credit utilization ratio — the amount you owe versus the credit you have available.

Personal finance expert Barry Choi said making payments on time and a recommended ratio of under 30 per cent can help protect or even improve the score. For example, if you have a credit limit of $10,000, $3,000 or less keeps the ratio low.

Credit scores range from 300 to 900, with a good score averaging about 650 or higher — though it can depend.

While a high score will help in getting approved for various loans and credit, a lower score below that mid-600s benchmark — also known as “subprime” — could lead to being offered a higher interest rate or even being denied.

TransUnion reported there were about 2.64 million Canadians considered “subprime” borrowers in the first quarter of 2023 — this classification was given to those below 640.

Low credit scores are just one factor, with another group known as the “credit invisible” also potentially facing difficulty.

“Not having a score is as nearly as bad as having a bad one,” said Scott Terrio, consumer insolvency manager at Hoyes, Michalos & Associates, which offers debt advice and bankruptcy services. “You’ve got no credit score history and lenders won’t lend to you without it.”

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“Credit invisible,” according to Statistics Canada, defines a person without sufficient credit history for a credit reporting agency to calculate a score.

Equifax reported last year that there were more than three million Canadians who were “credit invisible”, with another approximately seven million who have a limited credit history of two or fewer accounts.

Video: Money Tips Monday: How to understand and improve your credit score

There’s a common misconception that people feel they could be easily approved for something like a car loan because they’ve never used credit at all, Equifax’s Kuzmic noted.

For those without a score, especially young Canadians starting out, Terrio said it’s not bad to look “down the ladder” to get a secondary lender to provide a credit card or get a secured credit card, in which you make a cash deposit to insure purchases made.

This can help you start building your credit and eventually get a higher score, though opening too many new accounts all at once could lower your score due to the inquires that come with each.

Once you do have the credit score needed to secure a loan, experts say it’s important to be realistic about your finances and what you know you can afford. Terrio notes it’s not unusual for someone with a healthy credit score, such as in the 800 range, to be looking for debt relief via bankruptcy or a consumer proposal.

As Canadians mull over what their credit score is or how it could impact future decisions, Choi said there’s three things they can do when it comes to that magic number.

“Always pay your bills on time, keep your credit utilization ratio low, and be patient. It takes time for your credit score to improve,” he said.