Most of us have heard of credit scores but know very little about how they actually work. They’re extremely important in helping you get a mortgage, car loan, or pretty much anything that can be paid in installments. Understanding your credit report and credit score is vital to a healthy financial life and planning your recovery from insolvency.
So, what is a credit report? A credit report is an online financial document that is designed to assess how safe it is for a company or individual to lend you money. That’s all it’s designed to do. You credit report contains information about you and your credit transactions including your payment history, accounts that may have been sent to collection. Information that is part of the public record also appear on your credit report. This is were your bankruptcy notice will appear on your credit report as will a notice that you filed a consumer proposal.
Your credit score is not part of your credit report. While you can get a free copy of your credit report, you must pay if you want to see your credit score. However, the information that appears on your credit report is important because this is what is used to determine your credit score. Effectively your score increases if the activities on your credit report demonstrate that you use credit responsibly, and your score decreases if activity shows that you are a poor credit risk.
Every credit bureau has it's own proprietary formula, however the factors that enter into determining your credit score are largely the same:
- Your payment history. Do you pay on time or late,
- Your credit account utilization. How much you owe relative to your credit limit,
- The types of credit you've owe. You need a healthy mix of term loans and revolving credit like credit card debt.
- How old your accounts are. The longer you have used credit wisely, the better your credit score.
- Recent inquiries into your credit history. Applying for credit too often will lower your credit score.
Every time you apply for some type of credit, be it a monthly mobile phone contract, or a car loan, the lender will check your credit rating. They’ll see a score that ranges from 0 to 900. Zero is indicative of a poor score, while 900 is a perfect score. The average Canadian has a score of around 700, which is a very healthy number. Anything below 600 will mean that you’ll find it very difficult to secure a loan of any type.
Another thing to consider is that even if your score is decent, around 700, it's always worth trying to improve your credit rating, because the better your score the more likely you will qualify for credit at a lower interest rate. You can improve your score by fulfilling monthly repayments on time and paying off any debts you owe. If your credit report shows that you make payments on a consistent basis, it proves that you‘re reliable and companies are much more willing to lend to you.
To check your credit report visit Equifax Canada or TransUnion. Both of these companies will provide you with a free copy of your credit report if you send for it by mail. You'll need your social insurance number, driver’s license and various other types of information in order to fill out their forms. You can obtain one free report from each agency per year however this free report will not include your credit score. For a copy with credit scores you will need to apply for a paid version online at a cost of around $25 each.
It's always important to check your credit report periodically and make sure the information on your report is accurate. By reviewing your report regularly, you will be able to catch any errors and correct them. For example, if you find that your report notes an outstanding debt, you should offer proof of payment to the credit bureau to have that information removed from your file.
Remember that like most things in life, having a great credit rating can take time. As long as you keep an eye on it and have a financially responsible mindset, there's no reason why your credit rating can't be excellent.
It's also not necessary to chase a perfect credit score. You need only have a credit score that allows you to apply for the type of credit you need at a good interest rate. Improving your score so you can have more credit, that you might not be able to repay, is not a good financial decision to make.
For more tips on repairing your credit rating, read our guide on Managing Your Credit Report.