Why Canadians Should Check Their Credit Before Applying for a Loan

Your credit score plays a big role in your financial life, especially when it comes to getting approved for a loan. 

A strong credit score will open doors to many financial opportunities and benefits, while poor credit can make borrowing more expensive. That’s why it’s so important for Canadians to check their credit score before applying. It helps avoid surprises and gives you the best shot at securing low rates and great terms. Even though credit can be tricky, the good thing is that you don’t have to tackle it on your own! There are lots of great resources that you can use (like this one) to help you on your credit building journey. Keep reading for more about credit scores in Canada and how you can improve yours. 

Why should Canadians check their credit before applying for a loan? 

Lenders check your credit score to assess your creditworthiness and determine whether you qualify for a loan.  As such, knowing what your credit score is before applying for a loan helps you understand your odds of approval and the terms you may be offered. A strong credit score can improve your chances of loan approval and allow you to apply with lenders that offer lower rates,saving you money on your loan. Checking your score yourself is considered a soft credit check and won’t impact your rating — but once you apply, the lender may do a hard check, which can temporarily lower your score. 

On the other hand, a poor credit score or lack of credit history altogether can make it more difficult to secure financing.  If you’re worried about your credit score and wondering how you can improve it, stay tuned!  

Why are credit scores important to lenders in Canada? 

Credit scores are important to lenders because they tell them how likely you are to pay your debts on time. The higher your credit scores, the more confident the lender will be in your ability to repay your loan. 

Why checking your credit score before applying for a loan can give you an edge 

Checking your credit score before applying for a loan can give you a leg up on the process. Here’s why: 

Avoid unnecessary hard inquiries 

When you apply for a loan from a bank, credit union or private lender, the lender generally conducts a hard credit inquiry, which can cause your credit score to dip temporarily. If you apply for a loan from a bank with poor credit, you’re likely to be turned down for a loan as a result.  

In this case, you’re subjecting yourself to an unnecessary credit check, further pulling your score down. You can have better knowledge of who you can qualify with by checking your credit score before applying. Focusing your loan applications on lenders whose minimum requirements you meet can help you avoid multiple unnecessary hard credit checks and improve your approval odds.  

Improve your chances of loan approval  

As mentioned, by checking your credit first, you can apply with lenders whose minimum credit score requirements match yours, improving your odds of loan approvals. For instance, if you have poor credit, instead of applying with a bank, look into applying with a private lender or credit union who can help you build up your credit. while you work on building it up.

Wait to apply while improving your score 

If you find that your credit score is lower than you’d like it to be, you may consider holding off with your loan application (if your financial needs aren’t urgent) and instead take steps to improve your credit score using the tips we’ll outline below.  

How to check your credit score for free in Canada

There are several sources you can use to find out what your credit score is for free: 

Credit Bureaus 

Equifax is one of the two major credit bureaus in Canada and provides all Canadians with free access to their credit scores. TransUnion, the other major credit bureau, only provides free credit scores to Quebec residents. All other Canadians must pay a subscription fee to access their credit score directly from TransUnion, unless utilizing a third-party source as outlined below. 

Banks 

Many banks and credit unions offer their clients free credit scores thanks to their partnerships with the credit bureaus and other third-party services. BMO, RBC, CIBC, TD and Scotiabank offer their clients free TransUnion credit scores. 

Third-Party Sources 

Online third-party resources have become increasingly available to Canadians as a way to check their credit scores for free. These include Loans Canada's CompareHub, Borrowell, and Credit Karma. 

Note: When you check your credit score with a specific source, the score you see may not be the same score a lender sees. Your credit scores may vary across sites and from what lenders see for several reasons, including the use of different credit scoring models and discrepancies in the data reported to each credit bureau. 

What if my credit is bad?  

If you have bad credit and need a loan, don’t be discouraged—you have a couple of options: 

• Improve your credit. If you don’t need the money right away, consider waiting to apply and taking steps to improve your credit score. You can do this by making on-time bill payments, keeping your credit card expenditures to under 30% of your credit limit, and checking your credit report for errors (and fixing them).  
• Apply with an alternative lender. Banks typically require good credit for loans. Instead, you may have better luck getting approved for a loan with poor credit if you apply with an alternative lender. These lenders have less strict credit score requirements, making their loans easier to get approved for. Making on-time payments with alternative lenders (like us!) can also improve your credit score and help you with getting better rates in the future.  

Other benefits of checking your credit score

Checking your credit score before applying for a loan isn’t the only reason to check your credit score. Regularly checking your credit score offers many other advantages, such as the following: 

• Renting: Landlords may conduct a credit check to assess a candidate's financial responsibility and the likelihood that they'll make rent payments on time. Checking your credit score beforehand will give you a chance to improve your score and boost the odds of securing a rental. 

• Employment: Some employers check credit scores as part of the hiring process, particularly for roles that require financial responsibility or access to sensitive information. Reviewing your credit beforehand can help you prepare for any employer requirements. 

• Insurance: Insurance companies may check your credit score to determine your premium rates. Reviewing your credit allows you to make moves to improve your score before getting an insurance policy.   

• Identity Theft: A sudden drop in your credit score could be a sign of identity theft. For example, you might spot accounts opened in your name that you don’t recognize. If that happens, report it right away. 

• Error-Checking: Big dips in your credit score may be due to mistakes on your credit report. With a simple check of your credit score, you’ll know whether to look into your credit further. 

Bottom line

Checking your credit score before applying for a loan provides you with a clear understanding of your credit standing and helps you improve your chances of securing a loan with more favourable terms. A strong credit score can lead to lower rates and better loan options, while a lower score can do the opposite. By finding out what your score is beforehand, you'll be more informed about your situation and can take steps to improve your score.