Your Credit Report And Credit Scores

Understanding Your Credit Report And Credit Scores

A firm comprehension of your credit report and the factors that influence your credit scores significantly contributes to a healthy financial lifestyle. Regular monitoring of your credit report can reveal any financial missteps such as bounced checks, bankruptcy filings or lender inquiries, and other registered items like wage garnishments or car liens.

1. The Anatomy of Your Credit Report

Your credit document encompasses information reported by various financial institutions that you have engaged with. This includes credit card companies, banks, and telecommunication firms. The details captured include when you opened your account, the amount you owe, your payment history, and whether you frequently exceed your credit limit or if your accounts have ever been in collections.

2. Decoding Your Credit Score

Your credit score is a numerical representation of your creditworthiness. It ranges from 300 (poor) to 900 (excellent), with a score of 650 generally viewed as good enough to qualify for most credit cards, loans, and lines of credit. Lenders use a two-part rating system based on your TransUnion or Equifax credit report to ascertain your credit score and determine your credit risk.

2.1 Credit Type

The first part of the rating is a letter indicating the type of credit:

 

R: Revolving (e.g. credit cards)

I: Installment (e.g. mortgages, vehicle financing, personal loans)

2.2 Payment Status

The second part of the rating shows how current you keep your account. This info generally stays on your record for six years, except for debt management options and creditor inquiries, which usually only appear for three.

Here’s a brief overview of the ratings:

 

1: Pays as agreed

2: 31-59 days late

3: 60-89 days late

4: 90-110 days late

5: More than 120 days late

7: Payments through a debt management option

8: Repossession

9: Written off as ‘bad debt’ or bankruptcy

3. Factors Influencing Your Credit Scores

The calculation of credit scores can vary between creditors as each institution uses a proprietary formula for calculation. However, the scores are usually within a close range. Equifax identifies the following approximation of each factor’s impact:

3.1 Payment History (35%)

This factor reviews how you have repaid your debts, if you’ve honored the payment terms, your record of missed or late payments, and whether any collections actions have been taken against you.

3.2 Used vs. Available Credit (30%)

This aspect considers whether you carry a monthly balance on your credit accounts and how much of your credit limit you generally use.

3.3 Credit History (15%)

The number of credit accounts you have open, the length of time they’ve been open, and how long they’ve been in good standing are considered under this factor.

3.4 Public Records (10%)

This part takes into account whether there’s a prior history of Bankruptcy or Consumer Proposals and if there are any other public records that may indicate a credit risk.

3.5 Inquiries (10%)

Hard Inquiries (occur when you apply for new credit) and Soft inquiries (occur when you request a credit report or when existing creditors obtain a credit report update) are considered here.

Note: Creditors may also consider the duration you’ve worked with your employer, how long you’ve lived at your current address, and your income level among other factors.

4. Enhancing Your Credit Score

Optimizing your credit score is beneficial for several reasons. A high credit score opens more opportunities for you, especially when you’re looking to increase your credit limit, secure new debt, or get a competitive interest rate. The Financial Consumer Agency of Canada offers the following tips to enhance your score.

4.1 Maintain a Good Payment History

Your payment history is a significant contributor to your credit score. To improve it, always make your payments timely, pay at least the minimum amount every month, contact your lender immediately if you’re having trouble paying your bill, and never skip a payment.

4.2 Use Credit Judiciously

Aim to use less than 35 percent of your available credit. The more you use, the greater risk you pose to your creditors – even if you pay your balance in full by the due date.

4.3 Extend Your Credit History

The longer you have a credit account open and in use, the better your credit score. Opening new accounts could potentially decrease your score.

4.4 Limit Credit Applications and Checks

Too many credit checks on your report can make lenders think you’re living beyond your means. Each ‘hard hit’ that appears on your credit report will lower your credit score.

4.5 Diversify Your Credit

Having a variety of credit products such as a credit card, car loan, and line of credit makes you more attractive to lenders. However, always remember to use credit wisely.

5. Checking Your Credit Report

You can request a free copy of your credit report from credit reporting agencies. Check it periodically to ensure all records are accurate and up to date. You can contact Equifax online and directly at 1-800-465-7166 or TransUnion at 1-800-663-9980. Report any erroneous information to the reporting agency immediately.

6. Overcoming Debt Challenges

If you’re overwhelmed by debt and it’s affecting your credit report and score, you could reach out to a Licensed Insolvency Trustee for a Free Confidential Consultation. They can help you review your financial history, discuss your challenges and goals, and identify opportunities for you to achieve a permanent financial fresh start.

Conclusion

Your Credit Report And Credit Scores play a vital role in your financial life. Understanding them and managing them effectively can open up great opportunities for you. Therefore, it’s crucial to regularly monitor your credit report, ensure all data is accurate, and work towards improving your credit score. You can also seek professional help if needed to manage your debts effectively.

Find Your Personal Debt Relief Solution

Licensed Insolvency Trustees are here to help. Get a free assessment of your options.

Discuss options to get out of debt with a trained & licensed debt relief professional.