Credit is a fragile thing that can easily be damaged. Your credit rating can help or hinder your ability to get a loan, get a lease as a tenant or even get hired for a job. Each inquiry made by a lender, landlord or employer can reduce your credit score, so it is best to be careful about how many inquiries you have over a short period. It is all too easy in the beginning to take out credit that later isn’t as attractive as it once seemed. Being knowledgeable about personal credit information is important in order for you to use it effectively. The state of your credit can affect the terms of a financial agreement offered to you, including how much a loan is approved for, the interest rate and the insurance premium if that is applicable.
Your credit report is a rolling 10-year credit file history maintained by a credit bureau or agency that starts when you first borrow money or apply for credit. The report is used by a potential lender to verify identifying information, places of residence, employment history, existing loans and other outstanding debts, and any closed accounts. There are three main sections to a credit report: credit information, public record details and names of agencies/individuals who requested a copy of your credit report. In the credit information section, a history of your accounts with banks, credit card companies, credit unions, loan/mortgage/insurance agencies, utility companies, and any other agencies you have loans with is displayed with transaction details, credit limits, and any amounts outstanding. A potential lender can access all this information, so you will want your credit report to look favourable.
Your credit score is a three digit number that lenders often turn to first because, unlike the credit report, it takes into account bill payment history. The score ranges from 300 to 900, and the higher the score, the better it is. Both Equifax and Transunion have slight variances based on a version of the FICO formula (from the Fair Isaac Corporation). In this formula, payment history is given the most consideration, at 35% of your score. Outstanding debt compared to your income is given approximately 30% weight, with less debt compared to your income assessed higher. Credit history accounts for about 25% of the score, with a higher score given to a longer held account. New accounts opened are weighted about 10%, and it is better to have limited new inquires or accounts in a short period, such as in the past 30 days. Each agency’s score can vary for the same person. As a result, lenders may use the middle score for reference if a score is deemed borderline for extending the credit.
Your credit rating is another measure of deemed creditworthiness. Each credit history item is rated on a 1-9 scale, where a lower number is better. For example, a “1” rating means you pay your bills within 30 days of the due date and “9” means that you never pay your bills or have made a consumer proposal. The “R” ratings scale is as follows:
- R0: Too new to rate; approved but not used;
- R1: Pays (or paid) within 30 days of the payment due date or not over one payment past due;
- R2: Pays (or paid) in more than 30 days from the due date, but not more than 60 days or not over two payments past due;
- R3: Pays (or paid) in more than 60 days from the due date, but not more than 90 days, or not more than three payments past due;
- R4: Pays (or paid) in more than 90 days from the due date, but not more than 120 days, or not more than four payments past due;
- R5: Account is at least 120 days overdue, but is not rated “9”
- R6: No such rating
- R7: Makes regular payments through a special arrangement to settle debts
- R8: Repossession (voluntary or involuntary return of merchandise)
- R9: Bad debt; placed for collection; moved without giving a new address or bankruptcy.
In Canada, there are two major credit bureaus: Equifax and TransUnion. Both bureaus collect and track your credit information to help lenders or other businesses evaluate the risks of providing credit or entering in to a financial contract with you. Both agencies offer a free credit report once annually. They have forms on their website that you can print, complete and mail in or fax. A request for a report can also be made by phone if you follow the automated prompts. The free report often takes several weeks to come in the mail. The online report is nearly instant and provides your credit score, but there is a fee charged for the service.
Checking Your Credit Information
Obtaining and checking your credit report is important for many reasons. It allows you to view the information that is available to a potential lender and to address any errors with the lender or otherwise with the credit bureau. Reviewing your report also enables you to analyze where things may have gone wrong in your history so you can work to repair it.
In reviewing your report, you may find that your credit was harmed by several things that added up, such as accepting new credit cards that came in the mail or those offered at the retail stores for extra promotions. Changing your mortgage and banking to another financial institution also hurts your credit because it entails opening new accounts and your history does not carry over to the new bank. In looking at your report, you may see one or more late payments. This can easily happen when bills are due on various dates and payments are sent by mail.
Sometimes, your credit can be damaged by having co-signed a loan for someone who defaulted or having a joint account with a partner who spends and doesn’t pay the bill. Failing to pay child support or amounts ordered by the court can also hurt your credit rating once the credit agency becomes aware of these.
Understanding how credit information is used and how credit risk is determined can help you in your debt management and overall financial planning. For more information contact us at AC Waring & Associates Inc. We offer credit counselling and debt solutions tailored to your situation. Call or drop in to our Edmonton office for help today. 780-424-9944 or 1-800-463-3328 Alberta Region