Date

July 23, 2021

9 things to know about your credit score

Knowing your credit score and credit rating and understanding what’s in your credit report is important.

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9 things to know about your credit score

Knowing your credit score and credit rating and understanding what’s in your credit report is important. All of these are tools used by lenders when they’re deciding whether to approve you for a credit card or a loan, and when they’re determining the interest rate you will pay. Using credit wisely, making payments on time and avoiding missed payments are just a few things that can contribute to good credit. But there’s so much more to learn. This episode of the BDO Financial Wellness Podcast features BDO Licensed Insolvency Trustees Michael Comrie and Ilan Kibel, who provide a very comprehensive 101 lesson on credit scores. To learn more about our conversation with Michael and Ilan, read the full transcript below. - thumbnail

Knowing your credit score and credit rating and understanding what’s in your credit report is important. All of these are tools used by lenders when they’re deciding whether to approve you for a credit card or a loan, and when they’re determining the interest rate you will pay. Using credit wisely, making payments on time and avoiding missed payments are just a few things that can contribute to good credit. But there’s so much more to learn. 

This episode of the BDO Financial Wellness Podcast features BDO Licensed Insolvency Trustees Michael Comrie and Ilan Kibel, who provide a very comprehensive 101 lesson on credit scores. To learn more about our conversation with Michael and Ilan, read the full transcript below.

Financial Wellness Podcast Transcript

Tera:

Hello, you’re listening to the BDO Financial Wellness podcast and I’m your host Tera Beljo. There are a lot of questions around credit: How do you build good credit? What is a good credit score? And how does it factor in decisions when you go for a loan? And what happens when your credit has been damaged? There are so many questions and so much information to be shared that when I sat down with two of our LITs to discuss this topic, we covered so much that we decided to turn this into a two-part series. In this first part, we’re going to talk about credit scores. So, let me ask you this question. Have you checked your credit score recently? Maybe request a copy of your credit report? If you’re not checking your credit score, because you think it’s not important or you find it too confusing, our discussion today will help you out.

A good credit history can improve your ability to borrow now and in the future. And there’s a very good chance that a potential lender is going to check your credit history. So, it’s important to understand what contributes to good credit and what results in poor credit. In this episode, I sat down with BDO Licensed Insolvency Trustees, Ilan Kibel and Michael Comrie, who did a fantastic job of covering the credit score basics and debunking some of the myths about credit reporting. Welcome Mike and Ilan, a lot of people find the whole idea of checking their credit report intimidating and confusing. And there’s also a lot of terminology: credit file, credit report, credit rating, credit score, so much credit. So why don’t we start with a quick review, kind of a credit 101. So Ilan the section on the credit reports in the BDO Financial Wellness Booklet, I think it’s page 23 to 28, has a quick review of the differences between a credit report, credit score and credit rating. Can you go over that for me?

1. Your credit score is just one way to measure your financial health.

Ilan Kibel:

Sure. So, when we look at these different aspects of your quality of financial health and the different aspects that are going to make that up (for when you’re applying for loans and applications for credit cards or mortgages). And they use a different section. So, the credit report, which is generally the full history of who you are, how much credit you have, what kind of loans you’ve taken out. Then there’s the credit score, which a lot of people really settle focused on, and that’s really the rating that the credit bureaus do. You’re ranging from 300 to 900 and obviously closer to the 900 that you are, the healthier you look to a lender who wants to make a decision if they lend you the money: are you going to be able to pay that back?

And then credit ratings, which has another rating system that they’ve developed from what we call a zero to a nine. And that’s all dependent as to where the zero (you’ve had no credit) and a nine (whether you’ve done like a bankruptcy and your debts need to be written off). So there’s various aspects to…I would say your financial health file that you need to look at and be conscious of in when you’re making applications for loans or trying to get sort of buy a home, lease a motor vehicle, rent an apartment. So, there’s various aspects to keep saying your financial health that you need to be aware of. And so, all the aspects put together are going to be what is used to determine whether you’re a person that somebody or financial institution wants to lend money to.

Tera:

And Mike what’s on your credit report? Like what would you, if you were looking at your credit report, what would you find there?

Michael Comrie:

Yeah, so there are common elements. So, first thing you’ll see when you pull your credit is identifying information. So, things like your name, date of birth, SIN, address, stuff like that. You’ll also find your employment information. So not necessarily just the most recent, but maybe your prior two or three employment positions or situations. You’ll also find what are called your sort of credit accounts or your credit information. So, Equifax and TransUnion will often refer to these as trade lines. So, these are when you first pull out credit for a credit card or loan or car loan, whatever it may be, it gets recorded under those credit account or credit information section. Then you’ll find your public records. So, things like; insolvency filings, proposals, bankruptcies, liens, or secured debts, you’ll find things like civil actions or judgments. And you’ll also find any debts that have gone to collections; you also find them under public records. And then not last and not least, but you will find inquiries.

So those are when you are applying for credits and the agency or the lender, financial institution, whoever it may be is checking with Equifax or TransUnion for your credit, those count his inquiries. And you’ll also find a listing of those on your credit report. I would also just add that when you are thinking about your credit, you should keep in mind there are two nationwide credit reporting agencies in Canada, which is TransUnion and Equifax. And so, if you’re looking to pull your credit, it would be either or both of those two agencies.

2. Creditors need your permission to access your credit report.

Tera:

Now, when we’re looking at a credit report, you said inquiries by creditors. So Ilan, can anybody like, do we have to give permission, or can anybody put a hit on our credit report?

Ilan Kibel:

No, you need to give permission, so they have the terminology about permissible purpose. So, you giving a creditor or somebody who you’re trying to get a loan from, or rent an apartment from you have to give them their permission. Once you’ve given them that permission, they obviously have the authority to continue looking into you and doing checks on you. Obviously, if there’s defaults, they want to see where you’re at. So, you have to give them permission in order to do that.

I also wanted to just jump back into, we spoke about what is generally on your credit report. With people reviewing their credit bureaus they should also be conscious that certain things should not be included on your credit report. So, things about your age, ethnicity, religion, marital status, salary. So, those things should not appear. Then if you are doing a credit report and you see these on there, you need to get that corrected. The two credit bureaus that Mike mentioned, TransUnion and Equifax are pretty good in ensuring that that stuff’s not there, but there could be slip-ups maybe a bank report. So, you should just make sure when you’re reviewing that, that these things are not included in there because they’re really not used in calculating the credit score we spoke about earlier.

3. You can check your credit report and credit score regularly for free.

Tera:

Well, speaking of making sure those things aren’t there, how often do you need to check your credit report, Mike?

Michael Comrie:

Well, I mean, you should be checking it at least once a year. So, I mean “needs” may be not the right word, but you should at least be checking once a year. I would tell a person if they’re applying for credit over a short period of time, which it really shouldn’t be doing, but if they are, they should perhaps be checking a little bit more frequently. Because each time they do, you got to understand that Equifax and TransUnion, what gets reported to them is from institutions. So, it comes to them from the institution and then they are updating the report accordingly. So at least once a year, you should be applying to get your credit report and you can do it for free. And again, as I mentioned earlier, very important detail and Equifax and TransUnion will tell you if you visit their website, that not every lender institution or whoever it may be that reports, is reporting to both. Some report to Equifax and some report to TransUnion.

So anytime you pull your credit report from one, you should be pulling it from the other, because you may find information on one that isn’t on the other. Just something to keep in mind is when you are pulling your credit report from either Equifax or TransUnion, because it is free. If you’re using the free function, you won’t get a score. You’re just getting your credit report and all the information that we went over, that you would typically find on it.

Tera:

Okay. And Ilan, do you have anything to add there?

Ilan Kibel:

So just to add to what Mike’s saying, checking it once a year, I sort of do the analogy to your personal health. You go to a doctor once a year to check your vital signs, your blood pressure, everything like that. And this is the same thing. Then, as I say, what you don’t check cannot be fixed.

Tera:

It’s true.

Ilan Kibel:

So, if you’re not checking it and there are issues being reported that shouldn’t be reported…there’s a lot of stuff out there regarding fraud. So if you’re not checking it, it could sit there forever, and then it becomes more and more difficult to correct it and fix it. So, definitely something you should be looking at. And as Mike was saying, there are multiple ways of checking it through free options, which I think we’re going to jump into. But TransUnion from what I’ve just seen in a recent ad article is allowing people in Quebec to check their credit score online for free and Equifax have just launched a thing where you can also check it for free online right now. So due to the current circumstances, it’s a great option they’ve put out there for individuals.

Tera:

And Mike you wanted to add something?

Michael Comrie:

Yeah. Just to add for people who want to sort of keep a better pulse on their credit, there are credit monitoring programs. So, through Equifax and TransUnion and others as well. But I mean, if you’re going to use one of these programs, I always recommend you go to the source, which should be Equifax and TransUnion, and they’ll actually update you on a monthly basis. So, if anything gets reported they’ll tell you, and then you can review it to make sure it’s accurate. But just in general, you get a monthly update. There’s a fee involved through Equifax or TransUnion whereas other organizations might not charge a fee for that type of update. Like for example, through your credit card provider or bank, etc. But it is an option. People should be aware that there is the credit monitoring option.

4. Checking your credit score won’t hurt your credit.

Tera:

Now I’ve always been under the impression that when you check your credit score, you’re hurting your credit score. So, if I keep checking monthly and my not affecting my credit score Mike?

Michael Comrie:

So, if you are checking your own, so you’re pulling your own credit or you are checking your own credit score, it will not in any way affect or lower or have any impact on your credit score period, of any kind. And really when you’re talking about this, you should be talking about a soft hit or a soft inquiry versus a hard hit or a hard inquiry. So, what you are doing as an individual, checking your own credit, pulling your own credit report or checking on credit score is a soft inquiry. You’re not applying for credit, just looking — you’re getting a sort of a pulse on your credit. And for that reason, it does not impact your score.

5. Multiple credit applications can lower your credit score.

Tera:

Okay. And so, then what’s a hard hit Ilan?

Ilan Kibel:

So hard hit is when you’re doing the application, so you’re applying for a loan, a credit card, applying for rent to lease a motor vehicle. Those are when you have given the creditors permission to actually go into account and inquire on it, that becomes a hard and recorded hit as to you’re looking for credit. And the more you do it, the more it could impact your credit score. So, you want to make sure that you’re not running from 10, 15 financial institutions to do these things, because that presents the possibility that you could be a risk looking for too much credit.

Tera:

Go ahead Mike, you had something to add?

Michael Comrie:

Yeah. So just something to keep in mind, because this has come up Equifax and TransUnion. They have good articles on this. If you are applying for a very specific type of credit, so like a mortgage or a car loan. If you’re doing multiple inquiries over short period of time, and you work with the lender and Equifax to identify that they won’t have the same impact that would, if you had applied for like three credit cards in one month. Because they know you’re applying for the purpose of shopping for the best rate. And very specifically, Equifax has dates that — I think it’s 14 to 45 days — if you’re searching for a specific type of loan within that period, they won’t hold all of those hard hits or hard inquiries against you. So, something important to keep in mind, if you are looking for that type of credit product.

Tera:

Thank you for bringing that up because actually my husband and I just went through that. We were renewing our mortgage and we didn’t know if we wanted to stay with the bank we were with. And we did not know that information. So, we applied for a, I guess, a new mortgage with another company and then another bank came up with a lower rate and we’re like,” Oh no, we already used our credit hit over here.” So, it’s great information to have, because then we would’ve been able to apply. We thought it was going to hurt our credit. So, thank you for adding that because a lot of people don’t know that.

So, when you’re reviewing your credit report, what should you be looking for? What are some red flags? And are there habits that can hurt your credit score Mike?

6. Fraudulent charges and missed bill payments will also lower your credit score.

Michael Comrie:

Well, first thing to look for and it’s actually, unfortunately very common is for inaccuracies. And I mean, there are inaccuracies where it’s a mistake on the part of an institution you’ve actually borrowed from, or perhaps information was lost in a transition or translation between the lender and the credit reporting agency. But it’s regularly the case for people I work with that there are inaccuracies on their credit. And so again, you got to check both because you may find an inaccuracy on one that isn’t on the other, or you may find one that’s on both. Now, other than that, you may actually find things that are suspicious as in a debt shows up that you never borrowed or something that may be fraudulent. So, you have to look for mistakes, whether it be just a genuine mistake or an inaccuracy or something that is fraudulent or suspicious. So, that’s the first thing that has little to do with your behavior or your history, but it’s common so I bring it up first.

So, there are factors that make up your score. And the two major factors are your credit payment history. So, things like, are you missing your bill payments? How many bill payments have you missed? And you need to understand if you do miss a payment, it gets recorded even if you make that payment up. So, the rating might climb back up, but the fact that you miss the payment will be there for a certain number of years, Equifax and TransUnion have their own rules on that. But typically, derogatory or negative information will hang around for six years. So you got to make sure it’s lengthy. And now again a lender, I guess if you have caught up those payments, it may be fairly immaterial to them that four years ago for a month, you missed a payment, but it will still be there as the point and it factors into your score.

So, are you missing bill payments? Are you missing multiple bill payments as in, are they regularly late? One of the big factors and I used to, I don’t say it so much anymore because people are just, there’s so much information about your credit report and credit score online. A lot of people who come to me are more educated than they’ve ever been. But if you do have a collection item on your credit, it is really a story of the one bad apple spoiling the bunch. And so, this is something you very carefully have to look for. If you do find something like that, and it’s not an inaccuracy and it’s not fraudulent, and it is truly the case that you fell behind, it’s gone to collections. You should work on getting that resolved as quickly as possible. The fact that it went to collections will remain on your credit, but the balance will go to zero and it will slightly improve how that all impacts your credit.

Tera:

That actually happened to me. I got a ticket for not having my insurance. Well, I had it, I couldn’t find it in my car. I was flustered and it couldn’t find my wallet with my license in it so I got a ticket for it. And I was told just fight it because he’s like the police officers, like “I know it’s in here somewhere.” And he’s like just, “Just go fight it and get it thrown out.” I did, but we moved in the meantime. And so, I went and changed my driver’s license because my court date hadn’t come up. I changed my driver’s license, thinking this is how they’re going to find me for their court date and I never thought about it again. And because I never got the court date, I thought, oh, maybe the officer just kind of threw it out on his own because I provided my ID when I booked the court date.

Turns out that was not the case and it was sitting in collections, I had no idea. And you have to change your license with the court, not your address with the court, not your driver’s license. And I asked everybody like, “Did anybody know this?” And they’re like, “No.” So, even like tickets, you don’t even realize could be sitting in collections. And they had an old phone number for me, it was just such a bad situation. So, I ended up there without even realizing it. And it was such a small amount that I ended up paying it right away. I mean, it’s crazy how that could happen. But speaking of that now, how does somebody get bad information or inaccurate information off of their credit report Ilan?

Ilan Kibel:

So really, it’s speaking to and being in contact with the two credit bureaus. No one can really do that for you on your behalf you need to contact them. And if there’s issues that you’re disputing, you got a larger dispute with them and they will investigate and look into that. If there’s a confirmation of these disputes, then they will take that off. If there is no confirmation or they’re unable to prove it, it could be a little bit more difficult, but it’s really just being in contact. And once again, reviewing your report on an annual basis at a minimum being on top of this thing sooner, rather than later. Because as we said, the longer you let these things, certain fester, the more difficult it is, first of all, to prove that it’s not you, or you didn’t clear that transaction and then to have them removed. And as Mike said earlier, we don’t want to have these things sitting around on your report for six, seven years, especially if it’s something you didn’t initiate.

7. Credit utilization is paramount to a healthy credit score.

Tera:

And what about using credit? Like your available credit and how much you’re using? Does that affect your credit score Ilan?

Ilan Kibel:

Yeah. Generally, the rule of thumb is they don’t want you going above 30 per cent of your credit limit. So, if you’re sitting at the high, let’s assume you’ve got a credit limit of $5,000 in every month, you’re sitting at $4,500 of the amount you’ve used. You start becoming more risky to them and their perception is your ability or inability to repay the debt could get more and more difficult. So, the rule of thumb is keeping your credit limit down to at least 30 per cent of the available credit that you have.

Tera:

And Mike?

Michael Comrie:

Yeah. So, I wanted to sort of, I don’t want to go into too much history, but earlier I wanted to sort of just discuss the factors that make up your score, but not in too much detail, but we talked. Ultimately, if you’re listening to this podcast and you have questions about how utilization gets calculated or how you score, it gets calculated. You can always reach out to a Licensed Insolvency Trustee from BDO in your local region. But in general, you’ve got things like payment history. So, as Ilan mentioned, your debt-to-credit ratio, your credit utilization, and those are the two major factors between the two of them they’re impacting about 65 per cent of your score. So, you really got to focus on those and that’s why the credit utilization is paramount. Because you could accidentally without realizing it. And really nobody should be carrying a balance if they can avoid it. But if you are carrying a balance, it should never, as Ilan said, be above that 30 per cent.

But in addition to the payment history of the credit utilization, there’s also the length of the history. So, how long you’ve had your credit products, the mix of credit products. And again, we can get into that in another chat or perhaps later in the podcast. And then there’s the number of inquiries. So those are kind of the five factors that make up your credit score for anybody who’s wondering.

8. You have more than one credit score.

Ilan Kibel:

Sorry, just to jump in there. Those are how the two TransUnion and Equifax have put out there, what they calculate as the impact to your credit. What everybody needs to realize and what we always have when people come into our offices on the free initial consultation is my credit score is fantastic. I looked at my TransUnion, I looked to my Equifax and my credit score, I’m a good payer, I’m a regular payer. The banks, the financial institutions have their own algorithms metrics for calculating these things. So you may see a 650 score the bank has the own permutation of that. And they may calculate 500, they may calculate 700. So that number always sees not the carved in stone it’s how they’ve calculated it. So you got to be aware that you may even be able to walk into a bank based on your score, being a little lower than you think it is, but the bank may do a calculator say, “No, we will approve you for a loan or you qualify.”

So, you’ve got to take those into account. This is a guideline and not what your real health is, but everything sort of plays together when looking at your credit and your credit worthiness.

Tera:

Yeah Mike?

Michael Comrie:

Yeah. And just to add to that again, and there’s so much on this, so we could really just keep adding to it. But Equifax and TransUnion, even themselves talk about how there are various scoring models is what they call them.

Tera:

Okay.

Michael Comrie:

And so, you might get a score from an online provider that is wildly different from what Equifax provides, and you can walk into the bank with those and the bank may still decide not to lend to you. For example, you could have a great credit score, but your debts are like really high. So, you’re making all your payment history on time. All the various factors of your credit score are excellent, except for the fact that your debts are maxed out. So, you might have a score above 650 as Ilan says, but you’re maxed out, the bank is not interested in lending to you. So, just to add to the fact that there are various scoring models and it’s even recognized by the credit reporting agencies directly themselves.

9. Filing a consumer proposal or bankruptcy will affect your credit score.

Tera:

So, thank you that is really helpful, that’s a lot of good information. So, we’ve talked about Equifax and TransUnion and what makes up your score, but what you guys do is you help people with their debt issues who are struggling. So, how does all of this fit in, like, how long does a consumer proposal or a personal bankruptcy affect your credit file or your credit report, Mike or Ilan? Actually, Ilan go ahead.

Ilan Kibel:

So, from a consumer proposal or a bankruptcy point of view, the two credit bureaus, TransUnion, Equifax are sort of aligned the timeframe it used to be different. And recently they both caught up with each other, and for a bankruptcy it’s typically seven years it stays on your bureau. A consumer proposal gets a bit confusing the way you explain it, but it’s to a maximum of six years. If you do a five-year proposal, it’s on your bureau for an additional year. However, you do a proposal and you pay it off in your first year, it’s on for three years from the date of (last) payment. So, it stays in there. The one thing I always explain to individuals when we’re meeting with them, the banks did a fantastic thing for proving this to individuals where you look at your bank statement and they’ve got this little box on there at the bottom, says, “If you keep doing what you’re doing, paying your minimum payments, it will take you 45 years and five months to basically pay off the debt.” Which really theoretically means your credit is going to be effective for that long.

So, a consumer proposal and a bankruptcy ultimately may be the quickest and the best way for you to rebuild your credit in a shorter timeframe than continuing doing what you’re doing and really having no difference in the result.

Tera:

Mike?

Michael Comrie:

Yeah. So just because there are two reporting agencies just to get particular about it. So, Equifax will report your bankruptcy for six years from the discharge date, whereas TransUnion will report it for seven years. I don’t know why they have different dates, but they do. And something to keep in mind is if you are filing a second bankruptcy, both bankruptcies will appear on your credit for 14 years from the respective discharge dates. So, it does accumulate like the damage when you are filing multiple bankruptcies. Whereas with the consumer proposal, as Ilan aptly pointed out, it’s a maximum of six years or three years from the date of completion, period, full stop. And thankfully now finally Equifax and TransUnion have like some uniformity in this, whereas in the past they didn’t. So, we’d have to provide multiple explanations on how that works.

Tera:

Well, that was the first part of our two-part series. Stay tuned for part two of our conversation when we cover what you need to know about building good credit and rebuilding credit after bankruptcy or consumer proposal. If you’re looking for more Financial Wellness Podcasts, videos, debt management, resources and tools, visit our website, debtsolutions.bdo.ca. And remember we are here to help you turn the page on debt. Your next chapter is waiting.

Do you have more questions?

Date

July 23, 2021

9 things to know about your credit score

Knowing your credit score and credit rating and understanding what’s in your credit report is important.