In my previous Credit Coach blog (How to avoid being the victim of fraud) I talked about the need to check your credit score and report online periodically.
For this entry into the Credit Coach catalogue, we are going to provide a few basic facts and possibly demystify some myths about credit scores and credit reports.
As a Licensed Insolvency Trustee helping families deal with debt and gain access to the Bankruptcy and Insolvency Act, I am often asked about credit scores and ratings. A 2017 TransUnion study found that 56 per cent of Canadians don’t know how their credit score is calculated. In my practice, I find that people generally do not understand the differences between a credit score and a credit report, and how our behavior from month to month affects both.
What is on your credit report?
Your credit report is a history of your credit usage patterns and repayment history. It also includes other information specifically related to your credit, such as personal bankruptcy, accounts that have been written off and sent to collections, and inquiries from lenders requesting your credit history.
Items on your credit report are the result of lenders that have provided information about you to private credit monitoring companies. In Canada, the two main companies are Equifax and TransUnion. They hold, compile and then transmit your information to prospective lenders when you request credit of any kind.
Good decision making is key to avoiding long term borrowing problems, because items on your credit report generally stay accessible for six to seven years. Some items such as a second bankruptcy will stay for on your report even longer. Although your credit report contains considerable information about your borrowing habits, the primary bit of information on your report is your repayment history. This is reflected in your credit rating.
Here’s how your credit rating is determined: Each lender will report their experiences with you in a series of scores ranging from O to 9. Depending on the type of credit, the numerical rating will be prefixed with a letter representing the type of debt that is being reported. So let’s say you have a credit card (which is revolving credit or an R on the report). If you make minimum payments to your credit card on time, you will see a report of R1 for that lender. If you are slightly late — say 31-59 days — that rating slips to an R2. Ninety days late and you are now an R4. The ratings slide downward to an R9, which is generally a written off account, an item sent to collections and or a bankruptcy reporting. With the deterioration of your report occurring each 30 days or so, staying on top of payments and repaying debt entirely is important.
Your credit rating can take time to repair because items stick around for extended periods of time. However if you have hit a rough patch, righting the ship and installing new R1 items and paying down the debt is key.
What is a credit score?
A credit score, differs from the overall report. Your credit score is a grade generally between 300 and 900 that gets attached to you based on items posted to your credit report. Essentially it is a mathematical algorithm that scores you on your credit decision making. Your payment history, the number of different requests for credit and the type of debt you have all affect the score.
This BDO Debt Solutions podcast, Credit Scores 101, has some great insights, advice and tips from BDO Licensed Insolvency Trustees on how to maintain a good credit score and rebuild credit if necessary. One tip that I would offer: make sure you stay away from bumping into the limit on your cards. While, a good repayment history is a great start, going near or staying near the maximum available limit on your cards will hurt your credit score.
Why does it matter?
Some people aren’t really concerned about their credit report and credit score. They bounce merrily through life not missing a payment and not having to worry about debt. Even for these people, I would strongly suggest checking your credit report on an annual basis. Someone may be using your credit without your knowledge.
For most of us however, the credit score does matter. It affects how much you pay to borrow and whether you qualify for a mortgage. When you’re looking to rent an apartment, your credit history and credit score can affect whether or not a prospective landlord will approve your rental application. Regularly reviewing your credit report, and trying your best to make sound decisions will go a long way to achieving financial wellness and a stress-free, debt-free life.
If you want more to learn more about credit reports and credit scores, visit this page on the Canada.ca website.
Jayson Stoppel is a Licensed Insolvency Trustee and Chartered Accountant with BDO First Call Debt Solutions. With over 17 years in practice, Jayson assists individuals, families and companies with financial difficulties in Thunder Bay and throughout Northwest Ontario. To reach Jayson by email: JStoppel@BDO.ca
