Supporting Employees in Understanding Credit Scores in Canada

As an HR professional, fostering employee financial well-being is an important aspect of creating a supportive workplace environment. Financial stress can impact productivity and morale, so empowering employees with knowledge about financial fundamentals—such as credit scores—can help them make informed decisions. This guide reframes the basics of credit scores in Canada to provide actionable advice that employees can use to build and maintain strong credit, reducing financial stress and enhancing overall well-being.

What is a Credit Score?

A credit score is a number that represents an individual’s creditworthiness. In Canada, credit scores range from 300 to 900 and are calculated by credit bureaus like Equifax and TransUnion. Lenders and businesses use these scores to make decisions about:

• Approving loans, credit cards, or other financial products.
• Offering credit limit increases or competitive interest rates.
• Renting housing or even considering candidates for certain jobs.

Employees should know that a higher credit score not only improves the likelihood of approval but can also unlock better terms, such as lower interest rates. Conversely, a low score can make borrowing more expensive and limit access to credit opportunities.

Key Components of a Credit Score and How to Improve It

1. Credit Inquiries (10%)
   • Definition: Hard inquiries occur when lenders check your credit for new applications and can temporarily lower your score. Too many in a short period signals risk to creditors. Soft inquiries, like checking your own score, do not impact your credit.
   • Advice for Employees:
     Encourage employees to check their credit regularly (via soft inquiries) to monitor for inaccuracies or signs of fraud. Before applying for new credit, they should consider whether the product aligns with their financial goals to avoid unnecessary hard inquiries.
2. Credit Mix (10%)
   • Definition: This reflects the diversity of credit types that an individual has, such as credit cards, auto loans, and mortgages.
   • Advice for Employees:
     While having a mix of credit types can help, employees should focus on managing their current credit responsibly instead of opening new accounts solely to diversify.
3. Credit History (15%)
   • Definition: This measures how long an individual has had credit accounts and how consistently they’ve managed them.
   • Advice for Employees:
     Employees should avoid closing long-standing credit accounts, especially if there are no costs associated with maintaining the account such as an annual fee, as these contribute positively to their credit history.
4. Credit Utilization (30%)
   • Definition: This is the ratio of credit used to the total credit available. A utilization rate below 30% is ideal.
   • Advice for Employees:
     Educate employees about the impact of keeping balances low relative to their credit limits. For example, paying off balances in full or making multiple payments throughout the month can help maintain a low utilization rate.
5. Payment History (35%)
   • Definition: This is the most significant factor, reflecting whether payments are made on time. Late payments can harm a score significantly.
   • Advice for Employees:
     Encourage employees to set up reminders or automate bill payments to avoid missed due dates. Highlight that even non-credit bills, like utilities or rent, can be reported to credit bureaus if unpaid.

Why Financial Literacy Matters in the Workplace

Financial challenges can lead to stress, which impacts workplace focus and productivity. As an HR professional, consider providing tools and resources to help employees manage their finances effectively:

• Workshops or Webinars: Host sessions on financial literacy topics like credit management, budgeting, and debt repayment.
• Employee Assistance Programs (EAPs): Ensure employees have access to confidential financial counseling services.
• Educational Resources: Share trusted resources, such as free credit monitoring services or links to the credit bureaus.

The Bottom Line for Employees

Improving and maintaining a good credit score takes time and consistency but offers significant long-term benefits, such as access to better financial products and lower interest rates. By promoting financial literacy and encouraging responsible habits, employees can reduce financial stress, focus on their personal and professional goals, and enhance their overall quality of life.

Resources that can be shared:

• Monitor your credit report directly from the credit bureaus (paid service):
  • Equifax
  • Transunion
• FREE and reputable credit score providers, that also provide helpful literacy resources:
  • Borrowell pulls from Equifax
  • Creditkarma pulls from Transunion

Note: Not every lender or institution reports to both bureaus, and each bureau can weigh their scores differently, so it is highly likely that they will have two different credit scores between them. Due to a slight lag in reporting between the free providers from the official bureaus, checking all four sources can result in viewing four different credit scores. This is normal.

Written by: Cindy Marques, CFP from Open Access Ltd

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