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The difference between a credit score and credit rating

Your credit score and credit rating are both indicative of your financial situation and can significantly influence your reputation with potential lenders, as well as your ability to obtain loans, credit and other important matters. However, it is important to distinguish between the two. Equifax and TransUnion are the Canadian credit reporting agencies from which you can discover where you stand on both fronts.

A credit score ranks consumers anywhere between 300 and 900. The closer you are to 900, the less you will be considered risky to financial institutions when you seek a loan or other financial assistance and you may be able to secure lower interest rates. If your credit score is low, your history of payment arrears may be indicative of accumulating debt overload and a glaring sign to catch up or seek professional debt help in Edmonton.

A credit bureau essentially keeps track of your credit payment history and scores this for future lenders to review before deciding if and at what rates they will loan money to you. Rather than a single three-digit number like your credit score, each credit rating you have in your report is given one letter and one number. In this case, low numbers are better. A “1” means you make payments within the 30-day timeframe, while “2” means you pay anywhere from 30 to 60 days after it is due. A “3” means you pay 60 to 90 days late, and so on. If you reach “9,” your account will close because it means you are not making payments at all.

The letter in your credit rating simply indicates the type of credit, such as installment, open, or revolving. Installment credit may include mortgage and car lease payments, loaning all the money upfront and paying back a specific amount―usually monthly. With open credit, borrowers can obtain a maximum loan and pay it back afterwards, such as money for tuition. Revolving credit is used the most often and, for example with credit cards, varies each cycle depending on what you owe. The higher your credit rating numbers, the lower your credit score will be.

Your overall credit report is determined by your financial dealings and history with various lenders, such as banks, retailers, car dealers, credit card companies, and other institutions from whom you would have a borrowing relationship. Personal details such as your name, birthdate, social insurance number, contact information and employment history, provided by you, are all documented, along with your complete financial background and any legal matters related to money―for example, child support.

The information is then relayed back to the credit reporting agencies, Equifax and TransUnion which compile it for inquiries by prospective lenders, employers, insurance companies, apartment rentals, and others. However, anyone who requests information on your credit history must have expressed permission and reason before this is granted.

Your credit score is mostly determined by your payment history―particularly your timeliness or lack thereof in paying creditors―while the second highest contributor is based on how much credit you regularly use of your limit. Understandably, experts suggest that paying on time and keeping below about half of your credit limit will ensure your credit score remains high and also help you avoid accumulating credit card debt.

Likewise, it is important to demonstrate a long-term commitment―such as using the same credit card and making full regular payments. Credit reporting agencies also measure your different types of credit and how often someone requests to check your credit. Individuals with debt overload in Edmonton and across Alberta are likely to have their credit checked by potential lenders.

Past financial failings may hold less weight than recent ones, so learning from any previous debt overload issues, by not repeating them, is crucial. If you are concerned about your present debt crisis, a Licensed Insolvency Trustee serving the Edmonton and Central/Northern Alberta area is available to discuss a possible resolution to your situation. Contact A.C. Waring & Associates today to receive counselling on your current debt situation.