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by Janet Doyle
Everyone has one – a credit report, and a resulting score. From the time a Canadian consumer turns 18, credit becomes a very important number that has a huge effect on their life. You need credit for leases like homes or vehicles, or to apply for a mortgage. While this number is an important part of major life milestones, it’s often not well understood.
Credit Report
Your credit report is a history of your credit and payments where lenders report on the type of credit, payment history, how much is being used, any problems or disputes, collections activity, missed payments, banking information and any consolidation or insolvencies.
The two main credit reporting agencies in Canada are Equifax and Transunion; they receive updates from your creditors regarding your credit history. You can receive a free copy of your individual file by mail – and you should check it regularly. In addition to watching for any identity theft, many credit reports contain errors that you can dispute, and you can look for other ways to improve your credit score by evaluating your current situation. You can order your free credit report by mail from TransUnion or Equifax, or pay approximately $15 to order it online immediately.
Credit Ratings
Each credit account on your credit history is rated individually depending on what type of credit it is:
- I: Installment loan with regular payments for a specific period of time
- O: Open credit such as a line of credit or student loans.
- R: Revolving credit where payments are determined by your account balance as a credit card.
For each credit account, there will also be a number ranging from 1 to 9. Indicating the following:
- R1 Unused credit or too little credit history
- R2 Pays within 30 days of due date / not over one payment past due.
- R3 Pays in more than 30 days from payment due date, but not more than 60 days, or not more than two payments past due.
- R4 Pays in more than 90 days from payment due date, but not more than 120 days, or four payments past due.
- R5 Account is at least 120 days overdue.
- R7 Debt consolidation, debt settlement, or consumer proposal.
- R8 Repossession or seizure of property.
- R9 Collections or bankruptcy.
In addition to credit accounts, any inquiries are most likely logged on your report as “soft” or “hard”, which can stay on your credit report for just over two years. A hard inquiry is when a lender you’ve applied with reviews your credit history, and a soft inquiry is a pre-approval which does not impact your credit score.
If you find an error on your report, you can write the credit agency to dispute the error and they will send you a form to outline your dispute and include any documents (such as payment confirmation) to support your claim. If it isn’t changed, you can add a brief comment to the statement on file with your side of the story. This also applies to any charges that don’t relate to you or accounts you never opened, which could indicate you are a victim of identify theft.
Credit Score
Credit agencies take information reported by creditors to calculate a credit score for each person with credit that results in a 3-digit number that is between 300 – 900. These numerical scores (Known as Beacon or FICO scores) are not part of a regular credit report, but use a mathematical formula to generate the 3-digit number. Lower scores indicate a higher risk, and less likelihood to be approved for a credit card or a loan. Typically, approvals for lower credit scores will be subject to higher interest rates to offset the risk, as well as higher limits due to their reliability to pay as demonstrated by their credit score. Higher scores are more favourable and increase the likelihood of being approved for a credit card or loan as well as a better interest rate.
Many people are surprised to learn that payment history is just a small part of what makes up their credit score:
- 15% Length of Credit History
- 10% New Credit
- 10% Types of Credit
- 35% Payment History
- 30% Amounts Owed
Lenders may use your credit score as one factor to determine how likely it is that you can pay back a loan, and they can use a variety of factors and have their own criteria to determine whether they will qualify you for a loan.
What Hurts Your Credit Score:
Late Payment
It happens! Sometimes you miss a payment date, or a credit card expires on an automatic payment that was set up, and you don’t pay on time. One late payment can hurt your credit score and can stay on your report for up to 7 years.
High Credit Utilization
If you’re maxing out your available credit, you’re hurting your credit score by increasing the debt to credit ratio. Carrying large balances or consistently hitting your credit limit will hurt your credit score.
Closing Accounts
Closing an account (such as a credit card) could change your credit utilization ratio as well as the length of your credit history, both of which negatively impact your credit score. If you’ve paid off a credit card, a lender may decide to close the account, changing your credit score without your knowledge. Having a credit card for a long period of time will help your credit score.
Applying for a Lot of Credit at Once
When you make an application for a loan or a credit card, the lender checks your credit report, resulting in a “hard inquiry”. While similar inquiries can be considered by lenders as rate shopping (such as for a mortgage) to secure the best loan, too many hard inquiries in a short period of time is a red flag for borrowers, it could add up to numerous accounts and indicate that you are in financial trouble and numerous inquiries can hurt your credit score. If you are denied credit, you have the right to request why – let that be a starting point before filing any additional applications, resulting in more damage. In the end, inquiries have a small impact on your credit score.
Foreclosure, Seizure, or Liens
If you have ever had a delinquent account that has gone to collections and foreclosure, or you have a property lien, your credit score suffers. New in 2017 is an exception to this rule that applies to healthcare related debts, requiring a 6-month waiting period before reporting the handover to a collection agency it to the credit bureaus.
Consolidation, Debt Settlement, or Consumer Proposals
When you are unable to pay your bills and negotiate a new arrangement with your creditors, the associated accounts are marked poorly.
Insolvency
If at some point you are unable to pay your debts and choose to file bankruptcy, the credit accounts will be marked as R9 to show that you did not pay them in full.
How to Repair Your Credit Score
TransUnion cites a credit score lower than 650 as likely to have trouble receiving new credit, so how can you improve your credit score if you’ve made some mistakes? Financial technology companies offer free credit checks and monitoring services, but these companies will use the customer data to sell credit repair services for a fee or entice customers with larger loans at a high interest rate to decrease credit utilization and increase credit scores. A company that claims it can fix your bad credit report is usually trying to sell you on a service to correct errors – and you can do yourself for free.
Tips for Improving Your Credit Score
- Mark all your bill payments on your calendar, set an alarm on your phone, or set up automatic payments to ensure you don’t make a mistake.
- Sometimes there can be an issue with cashflow where several bills become due at once, so investigate requesting a change to the due date for payment to ensure you aren’t spread too thin on a particular date.
- You can improve your credit score easily by paying down debt to lower your credit utilisation. You can calculate your utilisation by adding all your balances up and then dividing by the total credit limit. Lenders typically like to see low ratios of 30% or less.
- If you can, keep unused credit cards open which will help improve your credit utilization.
- Dispute any inaccuracies on your credit report.
- If you have overdue bills and are in danger of going into collections, book a free consultation with a credit counsellor at Doyle Salewski to evaluate your options and work towards repairing your credit rating.
If you’re having trouble getting credit and financially struggling, it might be time to discuss your budget with a debt management professional at Doyle Salewski. Email [email protected] or call 613-706-2356 to set up a confidential, no obligation 1.5 hour session where we will help you evaluate all of your options.