Your credit score – Myths and how your credit score works.
Bankruptcy Canada’s Licensed Insolvency Trustee (LIT) wrote this article to dispel many common credit score myths that a Trustee most commonly hears.
Understanding credit and your credit score can be confusing for many Canadians due to credit score myths.
Did you know that your income doesn’t affect your credit score, using a personal loan doesn’t count towards your utilization part of your credit score – meaning using a personal loan can help you pay off your debt sooner and actually help improve your credit score – and you might have two different credit scores as there are two main credit reporting agencies.
This article will help you understand the truth behind some of the most common credit score myths in Canada.
A credit score is based on five main factors (in order of importance):
Payment history 35%
Amount owed and utilization 30%
Length of credit history 15%
New credit 10%
Types of credit used 10%
Myth #1 – More money earned means higher credit scores.
False! Your income has nothing to do with your credit score or credit report. Your credit score is solely a measure of your ability to pay your bills on time.
Myth#2 – Once you’ve settled a debt It drops off your credit report.
False! Information on your credit report stays on your credit report for up to seven years.
Myth #3 – Credit bureaus are accurate all the time.
False! Most credit reports contain errors.
It is essential that you check your credit report often and advise the credit bureau of any errors.
Myth #4 – Cash only policies will help your credit score,
False! Your credit score is solely a measure of your ability to pay your bills on time.
In order to have good credit you have to use credit, and use it responsibly.
Myth #5 – Closing your credit card accounts improves your credit score.
False! When you close a credit card account it may affect your credit utilization. Credit utilization is total credit available divided into your debt.
For example, If the total credit you have available is $10,000 and you are carrying debt of $3,000 your utilization rate is 30% ($3,000 divided by $10,000).
It is recommended that you keep your utilization below 30 percent.
Myth #6 – Pulling or looking at your credit report will lower your credit score.
False! Checking your own credit score does not affect your credit score.
Myth #7 – Disputing accurate information on your credit report will remove it.
False! The credit bureaus will remove inaccurate information but they will not remove accurate information.
Myth # 8 – A bankruptcy will give you a bad credit rating for 7 years; until the fact of the bankruptcy drops off the list.
False! If you are diligent about rebuilding your credit rating by:
- Correcting errors on your credit report;
- Getting a secured credit card, after you are discharged, and always paying the balance on time;
- Getting additional credit after a few more months, such as a car loan or an RRSP loan and always, always paying your bills on time.
You can rebuild your credit in about two years so you will be able to get credit at the best rates available to people with good credit, who have never been bankrupt.
Myth #9 – A person only has 1 credit score.
False! In fact, there are two major credit bureaus in Canada – Equifax and TransUnion – and each one has their own set of credit reports and generate their own credit scores.
These credit reporting agencies each base their reports on your credit based on the information they are given from your creditors. Sometimes, certain creditors will only report information to one credit bureau, or the other, but not both.
Additionally, Equifax and Transunion might not be updated in a timely manner by your creditors, resulting in the credit bureaus not having up to date information in your credit file. Therefore, TransUnion and Equifax will generate a different credit score based on the information they have received from creditors.
Myth #10 – Your credit score will be better if you have a higher income.
False! In reality, your income has no bearing on your credit score, nor does the type of job you have. The reason is that neither your income or job is used in the formula for calculating an individuals’ credit score.
Factors that affect your credit score are your payment history (35%), utilization ratio (30%), length of credit (15%), types of credit (10%), and inquiries (10%).
In order to qualify for a loan – especially a large loan such as a mortgage – you need to have a steady job and an income that is enough to make your loan reasonable and manageable, but this doesn’t impact your credit report / score.
Myth #11 – You get your credit score for free each year from Equifax and TransUnion.
False! It is true you can get a free credit report each year from Equifax and TransUnion. However, your credit report will not include your actual credit score. In order to receive your credit score from TransUnion or Equifax you must pay a small fee.
If you would like to get a free copy of your credit score, you can use a service such as Mogo or Borrowell, which will provide an updated copy of your credit score (supplied by Equifax) each month.
When you apply for credit or open a chequing account at your bank or credit union, they will run your credit report and you can also ask the bank to see your credit score at this time.
Myth #12 – My credit score and my spouse’s credit score are the same.
False! No one shares your credit record so therefore everyone has their own credit score, and only their own spending habits, payment history and amount of debt is used to calculate their credit score.
If you are responsible for a missed payment, get new credit, go over the limit on your credit cards, or pay off a debt only your score will be impacted, not your spouse’s score if the debt is only in your name.
However, in the case of a joint debt that is in the name of your spouse and yourself, then any changes will go on both credit reports.
Myth #13 – Becoming Debt Free Will Give a Person a Perfect Credit Score.
False! Getting out of debt will certainly improve your financial situation, although it won’t necessarily have an impact on your credit score. Your credit score is based on certain factors such as your payment history and your utilization of credit.
After you get out of debt, we recommend that you maintain an active credit account. You can use a credit card to make small monthly expenses, for example, to show the credit reporting agencies that you are handling credit in a responsible manner.
Without maintaining active credit, the Equifax and TransUnion won’t have a record of how you are managing your credit, which can actually hurt your credit score over time.
Myth #14 – Bankruptcy Permanently Ruins Your Credit.
False! After you get your bankruptcy discharge, a record of your bankruptcy will remain on your credit report for 6 or 7 years, depending on the province or territory in which you live and the credit reporting agency.
While the record of your bankruptcy will remain on your credit report for 6 or 7 years, you can begin rebuilding your credit immediately after getting out of bankruptcy and in fact, you can even qualify for a mortgage within 2 years after getting discharged from bankruptcy.
A Trustee will often suggest possible bankruptcy alternatives before recommending bankruptcy, but for many people (over 100,000 Canadians each year) bankruptcy is the right solution to their debt problems.
Contact a government licensed bankruptcy trustee today at toll free or contact us online.