July 11, 2022
There’s a lot to learn about credit scores but where should you begin? Here are the most frequently asked questions to get you started.
Knowing your credit score, credit rating and what’s in your credit report is important. All of these are tools used by lenders when deciding whether to approve you for a credit card or a loan, and determining the interest rate you’ll 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. There are a lot of questions around credit and we’re here to answer them all for you.
A credit report is a full history of who you are, how much credit you have and which kind of loans you have taken out. A credit score is the rating that the credit bureaus conduct ranging from 300 to 900, with 900 being the healthiest. This influences a lender's decision on if they trust you will pay them back or not. A credit rating is another ranking system on a scale of zero to nine. Zero entails you have no credit whereas nine represents extensive credit with possible bankruptcy or debt having to be written off.
No, your financial health is made up of many different aspects. You must be aware of each type when you’re applying for a loan, buying a home, leasing a motor vehicle and more. A financial institution will compile and examine all these aspects to determine whether you are a person they are willing to lend money to.
There are common elements that are found in every credit report. First, there will be identifying information like your name, date of birth, SIN, address and more. There will also be information about your employment currently and previously. Next, you will find your credit account or information which Equifax and TransUnion refer to as trade lines. This is where all the credit you use is recorded. The next section is your public records. This includes things like insolvency filings, proposals, bankruptcies, liens, secured debts, civil actions or judgements. This is also where you will find any debt that has gone to collections. Finally, you will find a list of inquiries. When you are applying for credit, the agency, lender or financial institution may check your credit with Equifax or TransUnion which counts as an inquiry.
When you are reviewing your credit bureaus, you must be conscious of certain things that should be excluded on your credit report. This includes things like age, ethnicity, religion, marital status and salary. If you see these things on your credit report, you need to get it corrected as they are not used or necessary in any calculations.
Not everyone has permission to access your credit report, you must give a creditor permission to view it. After that permission is granted, they will have the authority to look into your credit report and do regular checks. If there are defaults, lenders will want to see your current situation, which requires your permission.
You can check your credit report and credit score regularly for free. Like your personal health, you must do regularly check-ups with your credit. You should be checking it at least once a year. If you are applying for credit over a short period of time, you should be checking it more frequently than that. This is also key to ensuring you don’t get caught up in issues like fraud. Another option is credit monitoring programs that update you on a monthly basis of everything that gets reported. This will allow you to review it for accuracy and stay up to date.
Institutions report to either Equifax or TransUnion and they update your credit report accordingly. Therefore, anytime you pull your credit report you should be pulling from both of them to get all of the information. It is important to note that using the free function won’t provide you with a credit score just a credit report.
No, checking your own credit or credit score will not have any impact on your overall score. There is a difference between soft and hard inquiry. A soft inquiry is individually checking your own credit, credit score or pulling your own credit report. Looking at your file through a soft inquiry, will have no impact on your credit.
A hard inquiry is when you are actively applying for a loan, credit card or leasing a motor vehicle. This is when you have given the creditors permission to inquire into your account and have it recorded as a hard inquiry. Frequent hard inquiries will impact your credit score.
It depends on what type of credit you are applying for. If you are applying for a specific type of credit, like a mortgage or car loan, you will conduct multiple hard inquires over a short period of time. You should work with the lender and Equifax to identify that this won’t have the same impact as applying for something like multiple credit cards in a month. For a mortgage or car loan, they know that you are applying for the purpose of looking for the best rate and therefore won’t hold all of those hard inquires against you.
The most important thing you should be looking for is common inaccuracies. These can be mistakes by an institution you’ve borrowed from or information that got lost in transition or mixed up between the lender and credit reporting agency. Mistakes could also be found as suspicious behaviour. This includes debt showing up that you never borrowed or fraudulent activity.
One major factor that contributes to creating your credit score is your payment history. Ask yourself questions like do you miss bill payments? How many payments have you missed? If you do miss a payment, it will get recorded even if you make up for that payment later. Your rating might climb back up but the fact that a payment was missed will stay recorded for a certain number of years. Equifax and TransUnion have their own rules on it, but typically derogatory and negative information will stay on your record for six years.
If you have a collection item on your credit, it will be the one bad apple spoiling the bunch. When reviewing your credit report, collections are important to look for. Once you confirm that it is not inaccurate or fraudulent, you should work on resolving it quickly. It will stay recorded that you had an item that went to collections but having the balance at zero will slightly improve its impact on your credit.
The most important step to take when you are faced with this situation is to talk to the two credit bureaus, Equifax and TransUnion. If there are issues that you’re disputing, they will investigate it. If there is confirmation of these disputes, they remove the issues. If there is no confirmation or they are unable to prove the dispute, it may be more difficult to remove it from your credit report. This is another reason why you should review your credit report at least annually, especially when it’s bringing your credit down. Continuous check-ins will help you resolve these issues faster and easier.
A general rule of thumb is to not go above 30% of your credit limit. An example of this is having a monthly credit limit of $5,000 and currently sitting at $4,500 used. In this situation you are riskier to lenders and their perception of you, based on your ability or inability to repay the debt, becomes more difficult to establish. Instead, with this credit limit you should only use $1,500 or less of credit.
Your credit score is calculated by credit bureaus and has a rating between 300 and 900. The best score is 900 points. Any score over 660 is generally considered good. If you use credit responsibly, you get points. If you have difficulty managing credit, you lose points.
Anything over 660 is considered a good credit score, according to Equifax.
There are five determining factors when it comes to your credit score, according to Equifax, one of the main credit bureaus in Canada.
Credit scores are not fixed and can change over time based on an individual's financial behavior and credit management. It is possible to improve your credit score with certain strategies and responsible financial habits.
Rent could soon play a role in calculating your credit score. The federal government announced plans to let renters use their rental payment history to help improve their credit score, as part of its 2024 budget.
There’s already an app called Chexy that allows you to pay your rent with your credit card, a potentially great thing if your card allows you to collect and redeem points on things like groceries or travel.
You’ll want to review your credit card contract before signing up though. The app charges fee of 1.75% applies when using a Canadian credit card to pay rent, and 2.5% when using a non-Canadian credit card, so you’ll want to make sure you’ll come out ahead.
The five factors previously mentioned are part of the scoring model that TransUnion and Equifax use to calculate your credit score. Banks and other financial institutions have their own algorithm metrics they use to make these calculations. Therefore yes, you have more than one credit score depending on the financial institution. These various scoring models are recognized by the credit reporting agencies.
Yes, both a consumer proposal and bankruptcy affect your credit score. For a bankruptcy, Equifax will report it for six years from the discharge date. TransUnion will report it for seven years. If you file for a second bankruptcy, both bankruptcies will appear on your credit for 14 years from the respective discharge dates. The damage will accumulate when you file for multiple bankruptcies.
A consumer proposal stays on your file for a maximum of six years, even if you file multiple proposals. If you have a five-year proposal it stays on your file for an additional year. However, if you pay it off in your first year it will stay on for three years from the date of your last payment. A consumer proposal and bankruptcy may be the quickest and best way to rebuild your credit in a shorter timeframe than continuing what you are currently doing with no difference in results.
If you have more questions about credit scores and need support, reach out to a BDO Licensed Insolvency Trustee today for a free, no-obligation consultation.
July 11, 2022
There’s a lot to learn about credit scores but where should you begin? Here are the most frequently asked questions to get you started.
