Helen Burnett-Nichols
Beth Buczynski
A credit score is a three-digit number that gives lenders and financial institutions a window into how you manage credit. Credit scores are organized into ranges, from poor to excellent. A score on the lower end of the spectrum may be described as a “bad” credit score.
Lenders may use your credit score to determine whether to lend you money and the interest rate to charge. Your credit score can also play a role in your ability to rent an apartment or land a job.
Having a bad credit score can create challenges, although it is possible to strengthen your credit score over time by improving certain financial habits.
A bad credit score is below 560
In Canada, credit scores range from 300 to 900. The definition of a bad credit score can vary, depending on the reporting agency, but typically, a credit score below 560 is considered “poor.”
People with poor credit score may have trouble getting approved for loans and lines of credit, which is why people may consider it to be the “bad credit score” range.
In general, Canadians tend to have strong credit scores. In April 2023, the credit score modeling company Fair Issac Corporation (FICO) reported that the average credit score in Canada was 762.
Credit score ranges
Though each credit reporting agency and potential lender will have its own standards as to what credit scores are acceptable, the credit score ranges below represent what’s typical:
- Scores from 760 to 900 are generally rated excellent or exceptional.
- Scores from 725 to 759 are generally rated very good.
- Scores from 660 to 724 are generally rated good.
- Scores from 560 to 659 are generally rated fair.
- Scores from 300-559 are generally rated poor.
How are credit scores calculated?
The two main credit bureaus in Canada — Equifax and TransUnion — use different scoring models to calculate credit scores.
Credit bureaus use information about your borrowing activity from lenders and financial institutions to create a credit report, which is used to calculate your three-digit credit score. To do this, they use models provided by companies like FICO and VantageScore, as well as their own complex algorithms.
Credit bureaus don’t share the formulas they use to generate credit scores — as such, each may weigh factors differently or receive different information from lenders, which means your credit score might vary slightly from one provider to another.
Factors that determine your credit score
- Your payment history: The biggest factor in determining how credit worthy you are is your track record in paying bills — accounting for as much as 35% of your credit score. Your payment history includes information about your existing credit — everything from your credit cards, lines of credit, auto loans and mortgages — and your record of paying these on time, late or missing payments and how much was owed.
- Your credit utilization: Up to 30% of your credit score is determined by how much of your available balance you’re using vs. your credit limit (called your credit utilization ratio). The closer you are to your credit limit on a regular basis, the bigger the negative effect on your credit score, as it shows a risk of being overextended.
- How long you’ve been using credit (your credit history): Using credit responsibly over time is a big indicator of creditworthiness. As much as 15% of your credit score is determined by your credit history. Credit scores include your oldest and most recent accounts in their calculations.
- How often you’re applying for loans and credit products: “Hard” inquiries on your credit report — carried out by lenders every time you apply for a new loan or credit card — can affect your credit score and are responsible for about 10% of the total calculation. In some cases, looking for more credit may indicate greater risk to lenders. “Soft pulls” of your credit score or credit report — when you request to see your own score — do not affect your score.
Other factors affecting your credit score include “public records” — for example, whether you have a history of unpaid balances being sent to collection agencies or whether you have had a past bankruptcy.
What does a bad credit score actually mean?
A bad credit score doesn’t mean you’ve done anything wrong or that you’re a bad person.
Typically, a poor credit score simply means that you’ve had one or more “serious delinquency” on your credit report. A delinquency can include overdue bills, a high credit utilization ratio, or too many open credit accounts. Having accounts in collections or filing for bankruptcy also has a negative effect on your credit score that could last for several years.
In some cases, poor credit scores are related to credit history — you may not have had accounts open long enough to establish a strong credit score.
A bad credit score often results in financial challenges. You may have difficulty being getting a personal loan, mortgage or credit card. Even if you do qualify, accessing a favourable interest rate will be more challenging.
Poor credit scores might also have other negative implications on the ability to rent an apartment, qualify for certain jobs and in several provinces, access favourable auto or home insurance rates.
How to improve a bad credit score
Pay your bills on time: Paying your bills by their due dates — in their entirety — each month is an ideal way to improve your credit score. If paying off a credit card seems out of reach, making the minimum payment by the due date will also go a long way to helping boost your credit score.
Try not to max out your debt: Credit scores are influenced by your credit utilization ratio. Keep the balance of your loans and credit cards at 30% or less of your available credit whenever possible.
Build your credit history: It may be tempting to close out a credit card once it’s paid off, but leaving it open (especially if it’s a no-fee credit card) works to build your credit history – one positive factor that credit agencies take into account when calculating your credit score. If qualifying for an unsecured credit card is an issue, opening a secured credit card is another option that allows you to build credit.
Be mindful of opening new accounts: Each time you open a new credit card or apply for a loan, the lender will check your credit score. These ‘hard inquiries’ on your credit report may cause a small decrease in your credit score and can stay on your credit report for up to three years, so it’s important to consider new credit wisely.
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