If you’ve never looked at your credit report or credit score, we can’t recommend it highly enough. It is important that all Canadians understand the impact of their financial situation not only on their ability to obtain credit, but also on the impact it may have on other areas of their lives. Did you know that owners and employers can check your credit report and use this information to decide whether to rent an apartment or rent a property? And checking your report regularly, looking for errors or fraudulent activity, can also be an effective way to prevent identity theft.
How do I view my credit history?
There are two main consumer reporting agencies in Canada: Canada’s credit bureaus. These agencies keep track of personal information, past and present credit accounts, and the payment history of Canadians with one type of credit.
You can request your personal credit report free of charge from the official companies like Credit Protection Agencies. If you don’t want to wait for mail, you can access your information instantly, online, for a fee. Credit bureaus use information from your credit report to give you a credit score. Your score is used to determine your credit worthiness, based on how much credit you have and how you have used it in the past. Scores range from 300 to 900, 300 being considered poor and 900 being excellent. Qualifax and GrandUnion use slightly different calculations, so it’s wise to check your score with each agency each year. It is also important to note that most lenders and creditors report to only one of the two offices.This is why you will get two slightly different scores.
Factors That May Affect Your Credit Score
Credit bureaus take into account five main factors when calculating your credit score. They are weighted as follows:
Payment history (35%)
They will review the frequency with which you pay your bills and the frequency of late or missed payments. If you have accounts that have been collected or have filed a consumer proposal or bankruptcy, your credit score will be reduced accordingly.
Current debt (30%)
The higher your debt, the more you represent a borrowing risk for lenders. Keeping your debt below 35% of your total credit limit will help keep your score healthy.
Account history (15%)
The longer your accounts have been open, the better, especially if they are in good standing.
Number of inquiries (10%)
The number of times you apply for new credit can affect your credit score. Those made during the previous year are taken into account. Several consecutive serious surveys can have a negative impact on your score.
Types of accounts (10%)
The types of credit accounts are taken into account in your credit score. If you have different types of credit, this highlights your ability to manage different types of credit.
How Your Payment History Affects Your Credit Score
Your payment history is the most important factor in determining your credit score. Lenders want you to pay back the money they loaned you. Those who check your credit score can use the 3-digit number as a factor in determining your credit standing, but they can also take into account the ratings they see on your credit report. If your report contains multiple missed or late payments, you may not be able to borrow money and your account may be set aside by employment, insurance or rental of real estate. On the other hand, if you pay on time, your credit score will always be higher.
Understanding the codes of your credit file
Each account in your report will display a letter and number. The letter tells you the type of account:
• Payment accounts (I) – You make regular and fixed payments until the loan is paid in full. Examples: car loans and student loans.
• Open status accounts (O) – Balances are paid at the end of each billing cycle. Payments may be different each month, depending on the contract and usage.
Examples: payment card where the balance must be paid in full each month and mobile phone bills.
• Revolving accounts (R) – You can borrow money, if necessary, up to a defined limit. Payments vary depending on your balance. You can pay a minimum payment and have a balance. Examples: credit cards, lines of credit.
• Mortgage accounts (M) – Mortgage loans and equity lines of credit may or may not be declared.
A number between 0 and 9 is also assigned to each account, depending on how you manage payments on that account.
• 0 is used for new accounts
• 1 means you always pay within 30 days
• 2 means that you have paid between 31 and 59 days late
• 3 means that you have paid 60 to 89 days late
• 4 means you have paid 90-119 days late
• 5 means that you have paid more than 120 days late
• 6 is not currently used
• 7 means that you are working on a consolidation, consumer proposal or debt management program
• 8 means repossession
• 9 means that you are in recovery or have declared bankruptcy
In terms of payment history, which accounts count?
Installments, open credits and revolving credits will all be taken into account when calculating your credit score. So you want to keep control of credit card payments, personal loans, car loans, and lines of credit. If student loans have been deferred, it won’t be a problem, but when it comes to making payments, make them consistently. Mortgage accounts and payment history may appear on your credit report, but not always. The big five banks and some credit unions in Canada report to the credit bureaus, but may only report to one or the other. Other mortgages from small businesses and private lenders are unlikely to appear on your report unless you are late. Check your report to see if your mortgage account is there.
If you rent, these payments will not be reported to the rating agencies at all. Planning to eliminate your debt? If your mortgage account appears in your report and you pay the balance, you could actually lose points on your credit score because your housing situation is considered unknown.
What if my payment history is bad?
Since your payment history is so important, payment issues can certainly be an issue. Unfortunately, a late payment can remain on your account for up to seven years. The good news is that late payments of less than 30 days have no effect on your credit score and that your most recent payment history will have the most weight with creditors.
Lenders, employers, homeowners and insurance companies sometimes look at the big picture before making a decision. You can add notes to your credit report to explain the difficult circumstances.
You can also improve your financial situation over time. With good budgeting and persistence, you can reduce your balances. Setting up automatic payments and notifications can ensure you make all of your payments on time. If you have collections of invoices, pay them and ask the company to delete the document from your credit report.
How to improve your credit score when payment history has disrupted it
If you have had very little credit or if your credit history has payment problems, you can create or reconstruct a positive payment history:
• Private lenders – While it can be difficult to get a loan from a traditional bank, it is often easier to get a personal loan or mortgage from a private lender.
• Secure credit card – You will provide a security deposit before using a secure card, thereby reducing the risk to the lender. You will have the opportunity to prove that you can use your credit responsibly and your payment history will be reported to the credit bureau.
• Credit Rehabilitation Savings Program – Your payments will be reported to the credit rating agencies and you will be able to access funds as your capital increases, while improving your credit score.
• Regular use of credit and one-time payments will improve your credit score over time. Call us today to discuss ways in which we can help you use credit to resolve payment history issues, thereby reducing your credit score.