Credit scores in Canada, and a budget that holds up

A credit score is a lender's shorthand for one question: based on your history, how likely are you to pay back what you borrow? It affects whether you're approved and, often, the rate you're offered. The good news is that what drives it is fairly simple.

How Canadian scores work

In Canada, the two credit bureaus are Equifax and TransUnion. Each keeps a credit report on you, built from what your lenders report, and each calculates scores on a scale from 300 to 900. Higher is better. The two bureaus may show slightly different numbers, because not every lender reports to both.

The exact formulas aren't public, but the bureaus describe the same broad factors.

Payment history matters most. Paying at least the minimum on time, every time, is the single biggest thing. A payment 30 or more days late can be reported, and negative items generally stay on your report for about six years.

How much of your available credit you're using comes next. Owing $4,500 on a card with a $5,000 limit (90%) looks riskier than owing the same $4,500 across $15,000 of limits (30%). Keeping balances well below limits is commonly pointed to as helpful, often under about 30%.

Length of history, the mix of credit and new applications make up the rest. An older, well-managed account helps. Several applications for new credit in a short time can have a small, temporary effect.

Checking your score

Checking your own credit is a soft inquiry and doesn't affect your score. Both Equifax and TransUnion let you see your credit report for free, and many banks show a free score in their apps.

It's worth reading the report itself, not just the number. Errors happen, such as an account that isn't yours or a payment wrongly marked late, and you can ask the bureau to correct them.

A hard inquiry happens when you apply for credit and a lender checks your file. That's the kind that can nudge a score down briefly.

A budget that lines up with what lenders look at

When you apply for a mortgage, lenders look at two ratios, both based on gross (before-tax) income.

Gross debt service (GDS) is your housing costs as a share of income: mortgage payment, property tax, heating and half of any condo fees. Total debt service (TDS) adds every other debt payment, like car loans, credit card minimums and lines of credit. For insured mortgages, the ceilings commonly used are 39% for GDS and 44% for TDS.

Those ratios make a useful starting point for a household budget, even if you're nowhere near a mortgage application. Here's a simple way to set one up.

First, write down your monthly take-home pay. Then list fixed costs: housing, utilities, insurance, transportation and minimum debt payments. Next, estimate flexible spending such as groceries, eating out and subscriptions, ideally from a couple of months of real statements rather than memory. Whatever is left is what's available for savings and extra debt payments.

A common rough guide is the 50/30/20 split: about half of take-home pay to needs, 30% to wants and 20% to savings and extra debt payments. Plenty of households in high-cost cities can't make those numbers work, and that's not a failure. It's a starting point for seeing where the money goes.

A quick example

A household earns $8,000 a month before tax. Housing costs are $2,800 and other debt payments are $600.

GDS is $2,800 ÷ $8,000 = 35%. TDS is $3,400 ÷ $8,000 = 42.5%. Both are under the common ceilings, but TDS is close. Clearing the $600 in other debt would bring it down to 35%, which shows how paying down a card can matter at mortgage time as much as it does every month.

Where to go from here

That's the end of the adult lessons. If you'd like to try any of it with your own numbers, the calculators linked below each lesson run in your browser, need no sign-up, and show every assumption they make.