Your FICO score is a key factor that lenders consider when deciding whether to approve your loan application. You can think of it as a snapshot of your financial health and borrowing habits. If lenders like what they see, you’re more likely to get the green light. If not, your application can end up in the rejection pile.
Whether you’re applying for a mortgage, car loan, or credit card, your FICO score also influences the terms and interest rates that you’re offered. Therefore, it’s worth paying attention to this number and understanding how it works.
In this article, we’ll break down everything you need to know about FICO scores—from what they are to how they’re calculated and how you can improve yours to get better loan deals.
What is a FICO score?
A FICO Score is a three-digit number that represents your creditworthiness. It’s generated using a proprietary scoring model developed by the U.S.-based analytics company (previously known as Fair Isaac Corporation) that shares the same name.
Your FICO score is based on information in your credit report, which contains your borrowing history, payment habits, and other credit-related activity. Lenders use your FICO score to assess the risk of lending you money. In other words, it helps them determine how likely you are to repay your debt on time.
The FICO score is the most prevalent credit score model in Canada, used by up to 90% of lenders. There are various types of FICO scores, but the most commonly used version is FICO Score 8.
How does a FICO Score work?
A FICO score is a three-digit number that ranges 300 to 900. The higher your score, the lower the risk you pose to lenders. With a high score, you’ll be seen as more likely to pay back your debts on time, which can give you access to better loan terms, generous credit limits, and lower interest rates.
On the other hand, a low FICO score signals that you’re financially unstable and more likely to default on your debts. As a result, lenders will be less willing to extend credit to you or may only do so at higher interest rate. It’s not uncommon for traditional banks and credit union to reject loan applications from borrowers with poor FICO scores.
Note: General-purpose FICO score models, such as FICO score 8, 9, and 10, range from 300 to 850. Industry-specific FICO scores range from 250 to 900.
So how do lenders know your FICO score? The answer is that they obtain them from Equifax and TransUnion, Canada’s two main credit bureaus.
These credit bureaus use the FICO scoring model with their own algorithms to calculate credit scores for individuals and businesses. These credit scores are available to lenders nationwide for use in evaluating customer loan applications. When a lender wishes to look up your credit score, they contact access Equifax or TransUnion to get access.
FICO score ranges and what they mean
Understanding FICO score ranges is vital for measuring your creditworthiness. By knowing where you stand, you can set realistic expectations when applying for loans. You’ll also have a better idea of how much work, if any, you need to do to increase your score.
Here’s an overview of the different FICO score categories and what they mean:
- Poor (579 and below): Lenders from traditional institutions like the Big Five banks will perceive you as a high-risk borrower if you fall in this range. Qualifying for a loan from these institutions won’t be possible or at least challenging. Instead, you’ll need to turn to alternative lenders or those specializing in bad credit loans. Regardless, you’ll face high interest rates and restricted terms.
- Fair (580 to 669): With a score in this range, you’ll face slightly fewer hurdles in getting a loan. However, you’ll still have limited options and face steep interest rates. You’ll most likely have to seek out a lender outside the traditional lending market. You may have to put up an asset as collateral to secure a lower rate.
- Good (670 to 739): Most lenders, including the top banks, consider this range acceptable. Here, you’ll enjoy access to a wide range of credit products at competitive interest and favorable terms. This includes credit cards with reward programs and other benefits.
- Very Good (740 to 799): This range signals strong financial health. Most lenders will be willing to lend money to you at better-than average rates and terms. Asking for a credit limit increase won’t be an issue. Most Canadian borrowers fall in this category, with FICO reporting the average score in Canada to be 762 in 2023.
- Exceptional (800 and above): In this range, you’ll be spoiled for choice when it comes to borrowing options. Getting approved for nearly every type of loan at most banks will be easy, and you’ll qualify for the best rates and generous credit limits.
How is a FICO score calculated?
Your FICO score is determined using financial information found in your credit report. This information is classified into five categories, each with a different weight. FICO weights these categories differently for each individual, but the general breakdown is as follows:
- Payment history (35%): This is the most critical factor in your FICO score, as lenders want to know if you can pay bills on time. Your payment history covers various debts, including credit cards, utility bills, car loans, and payday loans. It also includes delinquent accounts and accounts sent to collections.
- Amounts owed (30%): This category includes details about the amount of debt you owe on all your accounts. FICO also considers how much of your available credit you’re using, also known as your credit utilization ratio. While owing a lot of money doesn’t necessarily equate to a low FICO score, having a high credit utilization does, as it signifies an overreliance on debt.
- Length of credit history (15%): This factor examines the average age of all your accounts and your oldest account. A longer credit history generally improves your FICO score since it signals you have experience managing debt.
- Credit mix (10%): This category considers the diversity of your credit accounts. Having a variety of accounts (e.g., credit cards, mortgages, and auto loans) can positively impact your score. It shows lenders that you can handle different types of debts responsibly.
- New credit (10%): This category looks at how many credit accounts you’ve opened or applied for over a short period. A high number negatively impacts your FICO score as it indicates a desperate need for credit.
The different FICO Scores used in Canada
As stated earlier, several different FICO scores exist. The Base FICO scores are the standard models used by most lenders. They help predict the chances that a borrower will fall behind on any type of loan. This group consists of the following:
- FICO Score 8: Released in 2009, this is the most widely-used FICO scoring model among lenders. As such, it’s the one you should be most concerned about as a borrower. This model is forgiving of minor missed payments and ignores small accounts sent to collections.
- FICO Score 9: This model provides a more accurate risk assessment for borrowers with sparse credit histories. Released in 2014, it ignores paid collections accounts and judges past-due medical debts less harshly.
- FICO Score 10: This scoring model made its debut in 2020. It features more advanced data analytics for precise risk assessments of borrowers. The model focuses more on personal loan balances and borrowing trends than others.
- FICO Score 10 T: Also released in 2020, this model incorporates trending data heavily, examining up to 24 months of credit activity. It offers greater predictive power of a borrower’s future behaviour, making it valuable for lenders.
There are also FICO scores that focus on specific types of debts. Here are some examples:
- FICO Auto Score: Specifically designed for auto loan lenders.
- FICO Bankcard Score: Tailored for credit card issuers.
- FICO Score 5: Designed primarily for mortgage lenders.
Note: Lenders might use different versions of FICO scores depending on the type of credit you’re applying for, so your score can vary slightly depending on the situation. It’s perfectly normal to have different credit scores.
How to find your FICO score in Canada
Unlike in the U.S., Canadian consumers can’t access their FICO scores directly. However, FICO has created the FICO Score Open Access program, which allows Canadians to view their FICO scores for free through select financial institutions. Only two Canadian organizations are currently participating: goPeer and Parachute.
While not genuine FICO scores, you can request your credit scores from Equifax and TransUnion. Your financial institution may also provide you with free access to your credit score as part of their online banking service.
How to improve your FICO score
Given the advantages of a healthy FICO score, it’s worth putting in the time and effort to increase it. Here are some financial habits that can help you improve it:
- Pay your bills on time: Late payments can have a significant negative impact on your score., so strive to pay all your debts on time. Lenders typically report a payment late if it’s over 30 days past due.
- Keep your credit utilization low: Aim to use less than 30% of your available credit. This rule of thumb applies to revolving credit products like credit cards and lines of credit.
- Don’t close old credit accounts: A longer credit history helps improve your score as it demonstrates experience managing debt.
- Avoid opening too many new accounts: Each loan application generates a hard credit check, temporarily lowering your score. Therefore, avoid opening or applying for too many loans, especially during a short time period.
- Check your credit report for errors: Mistakes on your credit report can hurt your score, so review it regularly and dispute inaccuracies.
The bottom line on FICO scores
Your FICO score is an essential part of your financial health. Understanding how it works, what influences it, and how to improve it can open doors to better borrowing opportunities. By staying on top of your credit habits and being mindful of the factors that impact your score, you can boost your borrowing power and obtain the lowest rates on loans.
To learn more about how credit scores work and how to increase yours:
How Using a Secured Credit Card Can Improve Your Credit Score
Understanding Your Credit Score
How to Rebuild Your Credit Score
What’s a Consumer Statement on a Credit Report – And Should You Have One?
