Credit history and ratings are often a confusing aspect of money matters for Canadians, and as Licensed Insolvency Trustees we are regularly asked about how consumer credit reports work. If you’ve ever had a credit account, read on to learn the essentials about consumer credit history and scores, and understand when, why and how to check your Canadian credit reports.
What is a Credit Report, and How Does it Get Created?
Your credit report is a recap of your credit history, and also contains personal and financial information about you. Your credit report gets created by credit reporting agencies (also called “credit bureaus”) when you apply for credit or borrow money for the first time, and lenders continually send information about your accounts to at least one of two credit bureaus.
Canada has two main credit bureaus, Equifax and TransUnion, and these are private companies that gather and store information from your creditors about your financial experiences in Canada.
- Credit bureaus sell consumer credit reporting information to their members, which may include lenders such as banks, auto leasing companies, retailers, and other financial institutions.
- Lenders, cellphone providers, insurance companies, landlords, some employers (such as where you will be working with finances), and other organizations may ask for your consent to access your credit report. These credit checks are often referred to as either ‘hard hits’ or ‘soft hits’.
- Hard hits may refer to checks done when you are applying for credit
- Softs hits may happen when a business requests your report to update a record, or when you request your own credit report
What Information is in my Credit Report?
Your credit report will contain information about your credit accounts, how you use them, and your payment history, which may include:
- Inquiries from credit checks in the last three years
- Credit accounts you use and when you opened the account, including credit cards, lines of credit, loans
- How much you owe and if you have exceeded your credit limit
- Whether you make your payments on time, if you have missed payments, or had NSF payments
- If an account has gone to collections, and registered liens and judgments against you
- Debt management plans such as credit counselling programs, Consumer Proposals or bankruptcy
- If a bank account has been closed “for cause”, such as money owing or fraud by the account holder
- Alerts for identity verification, fraud, and consumer statements
Providers for other ‘non-credit’ accounts like cellphone plans can also provide information to credit bureaus; a mortgage account and payment history may show up on your credit report too, but not always. Unpaid though, these are highly likely to be found in your credit report.
Some of your personal information will also be included in your credit report, such as your:
- Name and date of birth
- Current and previous addresses and phone numbers
- SIN, driver’s license, and passport numbers
- Employment history such as employers and job titles
What is a Credit Score, and How is it Calculated?
Credit scores are calculated based on information in your credit report and essentially assign a ‘grade’ on how well you use your credit, with the objective of helping lenders decide whether to extend you credit, how risky it is to extend you credit, and the terms (such as interest rates) by which credit may be offered to you.
Your credit score is a rating number that ranges from 300 points to 900 points, with 900 being the best. Because your credit history is constantly being updated, your credit score will change over time – generally it takes 30 to 90 days for your credit report information to be updated:
- You’ll gain points with actions that demonstrate responsible credit use, like making your full payments on time.
- You can lose points by actions that indicate unstable credit use, such as making your payments late.
Your score may not be the same at each credit bureau since they have access to different information and use their own algorithms and ‘weights’ to calculate your credit score. Credit bureaus don’t disclose the exact formulas they use in calculating credit scores, but some of the factors used include:
- The length of your credit history plus your payment history
- How much of your available credit you use
- The number of ‘hard’ credit checks to your report
To add another layer of mystery, despite having a credit score with each credit bureau, lenders use their own criteria to “score” your credit worthiness – so the credit score you have at each bureau is not likely the same rating as what a particular bank or other lender would use.
Common Credit Ratings
When lenders send information to credit bureaus, they use codes. The codes have a letter to indicate the type of credit, and a number to indicate when you made your payment. You might see these ratings in your credit report:
- R: Revolving credit (such as a credit card)
- O: Open status credit (a cellphone account for example)
- I: Instalment credit (like a vehicle loan)
- M: Mortgage loans
- The numbers range from 0 (too new to rate) to 9 (written off as a “bad debt” / sent to collections / bankruptcy); having a rating of “1” is the best. For example:
- If you make your credit card payments as due the account would be rated “R1”.
- If your credit card account has been sent to collection agents, the account would be rated “R9”.
How Often Should I Check my Credit Report?
It’s a good idea to check your credit report (from each bureau) yourself once a year so you can spot issues such as:
- Mistakes in your personal information (i.e., spelling of your name, address, date of birth, etc.)
- Errors related to your accounts and payment history
- Accounts that you do not recognize – this could indicate identity theft, or a mistaken identity, such as where account information for someone with a similar name has ended up on your report.
You may have to pay to access your credit reports online, and to see your credit score – this is generally unnecessary. If you want to save the money, you can make a request to get a free copy of your credit report mailed to you.
- Visit the websites of Equifax and TransUnion to access and download forms to request your free copies; there are options to order online, by mail, by phone, or in person.
If you find errors in your credit reports, you should follow each credit bureau’s process to have them corrected. You can also dispute information you think is incorrect and ask the credit bureau to add a consumer statement written by you, to provide an explanation and more detail about items on your report.
Don’t Use Your Credit Score to Gauge Financial Health
Credit scores were originally designed as a tool to be used by banks, and some information about how scores and reports work is proprietary, meaning it is not disclosed to the public.
A credit score alone is almost never going to be an accurate measure of your finances, for example: Your credit score can be high if you keep your accounts in good standing by making your minimum monthly payments, even if behind the scenes you are caught in a ‘borrow-repay-borrow’ cycle.
Instead of relying on how credit bureaus score you and what potential creditors might think, consider how well you’re managing your credit accounts and debts as they impact you and your daily life, such as:
- Do you have a budget that balances and allows you to accumulate savings?
- Are you constantly using credit cards to cover day-to-day expenses you don’t have the cash for?
- Have you been stressed about your debts, or worried about managing all your payments?
- Are you on track with debt repayment that will get you to debt-free in the next five years?
And if you suspect you may have a debt problem – you likely do! A Licensed Insolvency Trustee can help you to understand your situation and explore all your options to deal with your debt and move forward.
Get friendly expert advice and a personalized plan to be debt-free. Book your free debt consultation with Sands & Associates today – online and in-person appointments are available across BC.