Credit Rating 101

Information on Canadian Credit Scores & Reporting

Your credit report is produced by Equifax and TransUnion in Canada.

These two credit reporting agencies produce your credit score from this report.

Your credit score is used by lenders to determine whether you are a good credit risk.

Your credit score might also be referred to as a FICO score.

This is because the formulas used to measure your credit score were created by Fair Isaac & Company (FICO).

Equifax and TransUnion will look at the numbers in your credit report and produce a number between 300 to 900, which is your credit score.

Whereas a low score warns lenders you are a poor risk for lending credit to, a score of over 700 will leave you in control.

The factors used by Equifax or TransUnion are given a weighted factor of how much each one impacts your score.

The goal of our article is to help you understand what the factors impacting your score are, and how your credit score is determined.

By knowing how credit works you can maintain a good credit score, or have a solid understanding of the steps you can take to improve your credit.

This is key to obtaining large loans, such as a mortgage, at favourable rates.

The Topics we will explore in detail are:

What information is included on my credit report?
How long is the information stored on my file?
What makes up a credit score?
Why is having a good credit score important?
What factors affect my credit score?
How can I raise my credit score?

What information is included on my credit report?

The file of your credit report contains all of your personal information as well as the information submitted to the credit bureaus (TransUnion and Equifax) by your creditors.

The personal information on your credit report includes your name, age, social insurance number, whether you are married or not, your occupation and prior employers.

The credit accounts submitted to your credit report could include your account balances, the limits on the account, and information on your payment history.

How long is the information stored on my file?

The information contained on your credit file will depend on the province or territory you live in and the type of information.

• Inquiries made by credit grantors, when you seek a loan – minimum 3 years;
• Credit history – minimum 6 years from the date of last activity;
• Judgements or garnishments – minimum 6 years;
• Foreclosures – minimum 6 years;
• Collections – minimum 6 years;
• Secured loans – minimum 6 years;
• Bankruptcy – minimum 6 years from discharge (1st bankruptcies only, second bankruptcy at least fourteen years);
• Consumer Proposals or an Orderly Payment of Debt (OPD) Program – 3 years from the completion date.

What makes up a credit score?

Credit scores in Canada range from 300 to 900, with 300 being the lowest and 900 a perfect score.

You should aim for a credit score of at least 650, which is the magic middle number.

Having a credit score above 650 will help you get qualified for loans and will also save you money.

Borrowers with a high credit score (at least 650, but preferably 700 or above) will get better interest rates, which means lower payments on your debt!

You can have a different credit score from Equifax and TransUnion, so it is important to check your credit report (and get your score) from each credit bureau.

Additionally, Equifax and TransUnion might use a different credit score to determine your credit worthiness than the one they provide to you on your credit report.

This is because the lenders who pull your file have a different set of rules and policies for determining your credit risk.

You can get a copy of your credit report from Equifax and TransUnion for free once a year.

You must, however, pay a slight fee to receive your credit score directly from TransUnion or Equifax.

Why is having a good credit score important?

Your credit score is used by many people and companies throughout your life to determine your creditworthiness.

From lenders, to your employer, to perspective landlords when you are looking to rent an apartment, your credit score will be measured by all of these people.

Having a good credit score is important for:

• Loan applications – your credit score will be the primary factor in whether your application for more credit will be approved or denied. In addition, your credit score will impact the limit of credit offered to you by your new credit grantor, as well as the interest rate you will pay.

If you have a low score, you might be approved for the application, but you will pay a higher interest rate and get a lower credit limit.

This is because borrowers with a low credit score are seen as a higher credit risk.

Therefore, the higher your credit score, the better interest rates you will get and the more credit you will have access to.

A lower interest rate could mean big savings, especially on debt like a mortgage.

• Renting an apartment or house – when you make a rental application, your landlord will look at your credit history to determine your worthiness as a tenant.

The landlord wants to determine how much of a risk you are to their property.

• Renting a car – If you wish to rent a car, the rental company will check your credit report to determine if they are at a risk loaning their property to you. The rental agreement you sign gives the rental company permission to view your credit information.

• Your job search – when you apply for a new job, your potential employer might ask to check your credit report. Depending on what they find, they might pass you over for the job due to your bad credit.

What factors affect my credit score?

The factors that impact your credit score are:

• Your Payment History;
• Delinquencies;
• Balance-to-Limit Ratio;
• Recent Inquiries;
• Length/history of Accounts;
• Variety of Credit Accounts;
• Too many accounts.

What Else Might Negatively Impact My Credit Rating?

In addition to the reported factors, the credit bureaus don’t like to mention that the following can also negatively affect your credit report:

Errors

TransUnion and Equifax often make reporting errors on your credit report.

This is why it is so important to regularily check your credit report from both credit reporting bureaus.

Errors can cost you money and prevent you from getting the loan you deserve.

The information the credit bureaus (Equifax / TransUnion) uses to make your credit report is sent to them by the creditors electronically.

Equifax and TransUnion is under no obligation to ensure this information is accurate.

Therefore, only you can find errors in your credit report.

It is your responsibility to report any errors to the reporting agencies on your credit report.

What errors should I watch for on my credit report?

Errors on your credit report are common. Therefore, it is important that you check your credit report regularily for any inaccuracies.

Common errors to watch out for include:

• Incorrect Social Security Number;
• Evidence of Identity Theft (newly added accounts, maxed out accounts);
• Wrong mailing address;
• Unauthorized hard inquiries (soft inquiries don’t impact your credit).

If your report contains any errors it is your responsibility to contact the Credit Bureau. They will then investigate your complaint, and contact the creditor reporting the information.

The creditor will have to provide verifying information about the item placed on your file.

After you have reported any errors you should wait up to 60 days before re-checking your credit.

Should the disputed item remain on your report, you can increase your dispute further with the creditor directly. You can write to the credit reporting agency as well to have a consumer statement added to your credit file.

No Mortgage Information

Credit Bureaus assign rating points to people who rent, own and have no mortgage information. The bureaus will deduct the most points from those whose housing situation is unknown to them. If you have a mortgage it will be removed from your report once it is paid off. This is of course good, but it can also reduce your credit score.

Having no Debt

Without having credit accounts on file, the credit reporting bureaus will have nothing to evaluate. Therefore if you have no debt, your score will take a hit as lenders could see you as a risk without anything to evaluate you on.

Moving Frequently

Moving frequently can damage your credit score for two reasons. First, the length of time at an address impacts your score. Remaining at an address for a longer period of time increases your score gradually. Additionally, when you move your new landlord will run a credit check on you to see if you are a risk. All of those inquires will lower your score as well.

Frequently Changing Jobs

Staying at a job for a long time shows you have a secure job, which shows to credit bureaus that you are a less risky credit consumer, as you have security.

Having a high revolving balance

If you have a high balance that revolves around many different accounts, lenders will see you as a higher risk as this is usually a warning sign of financial troubles.

How Can I Raise My Credit Score?

In order to raise your credit score you must:

• Order your credit report from both Equifax and TransUnion each year and check for errors. It is your responsibility to report any inaccuracies on your credit report.
• Keep your credit utilization below 50%. This means if your credit card has a $5,000 limit, never go over $2,500.
• Use a secured credit card to make small monthly purchases. Using a secured card every month will send positive credit history to the credit reporting bureaus each month. As you can’t go into debt using a secured credit card (because it is “secured” by money you deposit with the company that becomes your “credit” limit) it is perfect for people without a credit history or with poor credit history. We recommend setting up small monthly charges on a secured credit account.

Having a good credit rating is important for many things in life.

However, if your credit is low don’t fret because it can always be rebuilt over time!