Give yourself (Good) Credit

Many Canadians know that good credit history will make it easier to get a mortgage or a line of credit but often a prospective employer, insurer, cell phone company or landlord may also check a prospective client’s credit during the application process. These are good reasons to make sure your credit history is in good order. But it’s even more important to check your credit on at least an annual basis because of the increasing occurrence of identity theft. Together, so many EXCELLENT reasons that checking your credit file is important to your financial health, but sadly only one in 10 Canadians check their credit report every year.  Canadians really need to do better – for their own peace of mind and financial health. That’s why it’s also important to know the difference between a credit score, credit report and a credit rating …

A Credit score, a Credit report and a Credit rating are 3 different things 

A credit report shows up to a 7 year history of transactions and accounts over time.  A credit score does not normally form part of a regular credit report but provides a judgement (based on a mathematical formula) translating the financial information contained in a credit report into a 3-digit number that lenders use to make credit decisions. A credit rating is normally made by a credit reporting agency and provides a rating of each item on a credit history items on a scale of 1 to 9.

What shows up on a Credit Report? 

A credit report is a “snapshot” of your credit history and is a major tool a lender will use to decide whether or not to give you credit. Your “file” gets created the very first time that you apply for credit and then gets updated by all of the organizations you deal with for financial transactions. A credit report will provide details on the following:

• Name, date of birth and SIN number
• Current and past addresses as well as phone numbers
• Driver’s license number and passport number
• Current and past employment information
• Credit and payment history relating to loans, mortgages, lines of credit and credit cards as well as utility and telecommunication companies like cell phones and cable providers
• Problematic activity including outstanding debt sent to collection agencies and NSF cheque writing as well as public records relating to bankruptcy declarations, registered liens and legal judgements
• Inquiries from anyone who requests your credit report

What’s not included on yoru credit report are bankruptcy discharges from 7 or more years ago, the payment or non payment of taxes or fines after 7 years or criminal charges against you that were subsequently dropped. 

Why you need to check your credit report

If you have a good handle on your money and your finances, a credit report should show information one already has. Hopefully, no surprises. But mistakes can and do happen and so does identity theft. This, I know personally. Identity theft is scary and a growing problem. Checking a credit report is the very best way to verify information and to ensure that one has not been a victim of identity theft. Information is power. Only by checking your credit report can you ensure that inaccurate information gets corrected

What’s a Credit Score ?

A credit score is a judgment about your financial health, at a specific point in time. It indicates the risk you represent for lenders, compared with other consumers. It’s also curious that there is no standard model for a consumer credit report in Canada; credit reporting agencies use their own forumula for accessing creditworthiness. So in other words, No one really knows exactly how credit scores work. Scores in Canada vary between 300 (just getting started) and 900 (a perfect score). The average score for Canadians is around 700. 650 is the magical middle number that will probably afford you a standard loan. A credit score of 750 will score better than 52% of Canadian consumers. Lower scores under 620-650 are seen as below average and can jeopardize loan qualification. Higher scores make it easier and cheaper for you to obtain credit. Indeed, the higher the credit score, the lower the risk to the lender and in some cases, better interest rates as well as a variety of different rewards programs may be offered. Conversely, having a lower score doesn’t automatically mean you won’t be able to borrow, but it could mean you will pay a higher rate. “it all depends” as each institution has its own scoring model.

5 major factors that go into generating a credit score

1. Payment history. Paying bills on time all the time is key. Companies usually report a late payment if it’s more than 30 days overdue; no matter the size of the payment. Delinquent payments can remain on a credit report for 6 years.
2. Balance to limit ratio. Using up all available credit reduces a credit score, while having unused credit available can help. As a rule of thumb, limiting the amount of debt owed to 30-40% of a credit limit is optimum.
3. Length and Credit history. The longer and more stable a credit history the better. (Hence it’s helpful to hold onto older credit cards you no longer use) A bankruptcy can have a devastating impact on a credit score and stays on a credit report for 7 years.
4. Type of credit matters. Lenders want to see that you can handle more forms of credit than a simple credit card. A healthy credit profile has a balanced mix of credit accounts and loans
5. Recent and frequent inquiries. Too many inquires in a short period of time can be seen as a sign of possible financial distress or difficulties. Checking your own credit can be done regularly but when others check your rating it can impact your score. So it’s best to avoid applying for credit unless you have a genuine need for a new account.

The difference between hard and soft credit inquiries

There are 2 types of credit inquires and they impact your credit score differently. “Hard inquiries” such as an application for new credit, will lower your score; while “soft inquiries” such as requesting your own credit report, and businesses checking your file for updates to your existing credit accounts will not appear on your file or lower your credit score. Hard inquiries can generally drop your score by 7 points or more.

In summary, a good credit score is valuable. Not just when you have a need for credit but often when changing employment or residence. Hence, it’s worth protecting and/or improving a credit score.

How to protect or improve your credit score:

1. Pay all of bills on time; even the small ones.
2. Order your credit report at least annually to ensure accuracy and afford yourself the opportunity to correct errors
3. Use credit but avoid using all available credit and repay credit on time all of the time. Set up automated payments to make sure that happens
4. Avoid applying for credit unless there is a genuine need for a new account.
5. Be aware when you have authorized consent for a credit inquiry. Sometimes such consent might be buried in the fine print at the bottom of a very long document.
6. Stability matters. The longer you remain at one address and with the same employer the more secure you will appear to lenders.
7. Reduce high revolving credit. High balances rotating between different credit accounts can be interpreted as a credit risk. 
8. For those with impaired credit history or a poor credit score, a good first step would be to secure a credit card by putting a security deposit down. Secured credit cards normally come with higher rates but the idea is to pay off the balance in full and on time in order to re-establish credit. 

It’s a good practice to order your report at least once a year from both of the major credit reporting agencies in Canada because information may not be consistent. Credit reports from Equifax and TransUnion can be requested for free when requested by mail, fax, telephone, or in person. To access a report online, there’s a charge (in my mind it should be free to ensure information is accurate but that’s a different story). Accessing your credit score will be an additional fee but a few different and new companies are now offering credit scores in Canada easily and for free!

Borrowell ,Mogo  Credit Karma and Rate Hub all allow you to check your scores for free, usually instantly or in just a few minutes and their “soft inquiries” will not affect your credit score. 

Knowing your credit score is a good first step in improving it or ensuring the accuracy of your credit report – it’s an important part of managing your personal finances and will give you peace of mind that you haven’t been a victim of identity theft. That’s a good investment for your financial future.