Understanding Your Credit Report
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Your credit score is one of the most important aspects of your financial life. Whether you like it or not, the way you behave with credit today (and the way you did yesterday) will have a major impact on your ability to make moves like buying a home, getting a new car, a new job, securing a loan and more tomorrow. Do you know where your credit stands, or why it’s so important?
If not, or if your credit score is lower than you want it to be, we’re here to help! Understanding your credit report and your score is easy, and once you’re up to speed, you can get to work on managing your relationship with credit effectively.
What is a credit report?
A credit report is a summary of your history with credit. The first time you opened a credit card or borrowed money from a financial institution, your credit report was created. As you continue to use credit throughout your life, your lenders (any organization or individual that you borrow money from) will send information about your behaviour to credit reporting agencies to add to your report.
What kind of information is held in my credit report?
Your credit report contains a variety of pieces of personal and financial information about you. This might include your full name, birthday, address, social insurance number, your passport number, your driver’s license, information about your job or your employer and so on.
It will contain factual information about your history with any credit cards and loans in your name, including:
when you opened your account
how much you owe
if you make your payments on time
if you miss payments
if your debt has been transferred to a collection agency
if you go over your credit limit
personal information that is available in public records, such as a bankruptcy
It may also include information about any bankruptcy decisions made against you, debts sent to collection agencies, a record of who’s inquired about your credit over the past three years, your history with NSF’s and/or bad cheques and more. There might also be information about your mortgage, car loans, line of credit and your history with your mobile and Internet providers in your credit report as well.
What is a credit reporting agency?
A credit reporting agency (sometimes referred to as a credit reporting bureau) is a private business that specializes in the collection, storage and protection of information related to people’s credit. In Canada, there are two main credit bureaus: Equifax and Transunion.
Though these two businesses operate around the world, they will only collect information relating to your credit history in Canada based on your social insurance number. If you’ve lived in another country in your life and wanted to access your credit history from that time, you’d have to contact a credit reporting bureau that serves that country specifically.
What is a credit score?
Using the information from your credit report, credit reporting agencies create a three-digit credit score for you. This figure serves as an overall description of how well you’ve managed credit since you started using it, and gives lenders a quick snapshot of how risky it is to lend you money. A high credit score means that you’ve proven yourself to be extremely trustworthy with credit, while a very low score means that you’ve consistently failed to manage the credit afforded to you by lenders in the past.
Credit scores fall within the range of 300 to 900, and then can be further divided into one of five categories within that spectrum. Keep in mind that perspectives may differ between lenders, but this chart sums up the general perspectives held on each range:
Is there a bare minimum credit score I should be aiming for?
Of course, most people aim to have the highest score possible, but there is no magic number to aim for when it comes to credit scores because every lender is entitled to setting their own score requirements. As a rule of thumb, it helps to be in the top 60% of candidates for most things. According to Equifax, “credit scores from 660 to 724 are [generally] considered good; 725 to 759 are considered very good; and 760 and up are considered excellent.” People with scores lower than 660 are going to be more likely to struggle to acquire credit from lenders, but there’s no legal requirement that says people can’t lend to them.
How is my credit score calculated?
Using the information in your credit report, credit reporting agencies use specialized formulas to come up with your credit score. One of the tricky things about managing credit is that credit reporting agencies don’t publicly share the formulas they use to calculate scores. That means it’s impossible to know with certainty how your behaviour will affect your credit score until after you’ve acted. However, there are a number of behaviours or factors that you can reasonably assume will affect your score, including:
how long you’ve had credit
how long each credit has been in your report
if you carry a balance on your credit cards
if you regularly miss payments
the amount of your outstanding debts
being close to, at or above your credit limit
the number of recent credit applications
the type of credit you’re using
if your debts have been sent to a collection agency
any record of insolvency or bankruptcy
One of the important points to keep in mind about credit is that having no credit history is about as bad as having poor credit history. Even if you’re a financially stable person who lives debt-free, if you don’t have any history with credit, you’re still automatically lumped into the same category as those with poor credit scores. If a credit bureau has no information collected on you, they have no information to offer a lender seeking it. As such, even if you don’t explicitly need it, it’s important to use credit as part of your financial routine in order to build that history and prove your credit worthiness.
If I check my report between bureaus, my credit score is different. Why is that?
Equifax, Transunion and any other credit reporting bureaus you may seek a report from are all going to use similar, but slightly different formulas to calculate your score. As the public doesn’t know each bureau’s formula, it’s hard to say what specifically causes the difference. However, as long as there isn’t a major discrepancy between bureaus (ex. having a 890 at one bureau and a 490 at another), don’t be too concerned about the difference between your scores.
When a lender requests a copy of your report or asks for your credit score, they may also see a different number than you do. This is because lenders may prioritize certain aspects of your history with credit over others, such as if you carry a balance on your loans or if you make your loan payments in full each time, which therefore may swing your score in a slightly different direction.
Another figure to be aware of is your FICO score. A FICO score is a credit score as designed by the Fair Isaac Corporation, and is a system used by up to 90% of lenders in the United States and Canada. Your FICO score may be, again, different then the score you’d receive from Equifax or Transunion. It should be noted that while FICO scores are freely available to American consumers, Canadians unfortunately cannot find out their FICO score without making a hard enquiry on their credit report, which can contribute to lowering it (more on that in a minute). As such, be cautious about requesting your FICO score - unless you indisputably need it, it’s probably not worth the mark on your report.
Who can see my credit report?
Because there’s a great deal of sensitive information held in your credit report, not just anyone can view your credit report freely. However, there are a variety of people or organizations who would be considered lenders, and therefore would have some claim to seeing the information in your report. These include:
banks, credit unions and other financial institutions
credit card companies
car leasing companies
retailers
mobile phone companies
insurance companies
governments
employers
landlords
Any of these organizations or individuals might need to check your credit in order to make an informed decision about you, such as whether or not to approve you for a loan or rent an apartment to you.
If you do find yourself in a situation where a lender wants to see your credit report, they must obtain your consent first. However, if you live in Nova Scotia, Prince Edward Island or Saskatchewan, the laws are slightly different; lenders need to only notify you (not obtain your consent) that they’ll be accessing your credit report.
How do I access my credit score or report?
As per federal law, as a Canadian resident, you’re entitled to one free copy of your credit report each year from Equifax and Transunion. In order to claim it, you’ll need to make a written request to either company using the forms they provide that includes two pieces of identification (ex. a scan of your passport). There are also a few different businesses, like Credit Karma and Borrowell, that’ll offer you a copy of your credit report for free.
You can also pay for monthly services from the major reporting bureaus, like Transunion, that’ll offer you your credit report as well as a number of insights on your overall status with credit. With these kind of services, you’ll also get notifications when your credit changes or when new information is added to it. This can help you catch identity theft as soon as it happens, and will assist you greatly if you’re actively working on managing your credit score. If you’re interested in learning more about Transunion’s monthly reporting program, click here.
Why is my credit score so important?
The big question! Let’s say you want to apply for a mortgage, finance a vehicle or even just purchase a new phone and pay for it over a term contract with your mobile provider. All of these situations, and many more, require a lender to enter into a long-term arrangement with you that involves them fronting you a large asset or amount of money. In exchange, you’d be on the hook to pay them back for it (usually plus interest) as you use it over a fixed term. Your credit score is important because it gives lenders of all kinds a baseline of information to evaluate your request and determine if they want to engage in that arrangement with you.
If you’ve got a high credit score, you’re going to be seen as a desirable borrower - someone who pays back loans in full and in a timely manner, and who can be trusted to take on the major responsibility of a massive loan like a mortgage. If this applies to you, you’ll likely be able to use that credibility to negotiate for lower interest rates when financing something large like a car or a house, which might save you a considerable amount of money over time.
If your credit score is very low, you’re unfortunately not likely to be seen as a desirable candidate to most lenders. If you’re competing with others to obtain something from a lender, like in the case of renting an apartment or even applying for a new job, having a lower credit score than other applicants will mean you’re less likely to acquire what you want. Sometimes lenders are willing to consider other factors when making big decisions, like if you have a co-signer who’s willing to vouch for you, but you’ll inevitably have a harder time accessing credit for the things you want than someone with a higher score.
Is it true that checking your credit score lowers it?
This is one of the most common myths about credit reporting. In Canada, checking your credit score or report on a regular basis will not lower your score. However, the origin of this misconception is based in fact: if too many lenders are checking your credit report on a regular basis, this will contribute to lowering it.
When you request a copy of your own credit report, the request is recorded and noted as a “soft inquiry”. This is an important part of understanding and managing your credit, and as such, does not affect your credit score.
However, when a lender checks your credit, this is recorded as a “hard enquiry”. This record shows that you’ve sought out credit, and can be seen by other lenders for up to 36 months after the inquiry is recorded. This is because when someone checks your credit, it’s implied that you’re trying to get approved for some kind of credit from them (otherwise, they wouldn’t be checking). While that’s normal on an occasional basis, it can be seen as suspect if there’s record of multiple lenders checking your report all within a short period of time. What this implies is that you’re either urgently seeking credit from wherever you can get it, or that you’re trying to live beyond your means, both of which would make you a poor candidate to receive credit. As such, this increase in inquiries will actually bring your score down, so be plan ahead and be mindful about how and when you apply for credit.
How often should I be checking my credit?
Though it’s an important thing to be aware of, you don’t need to be checking your credit on a daily basis as you would with a bank balance. For one, credit reporting is not in real-time: any actions you take that might affect your credit won’t actually reflect in your report until 30-90 days have elapsed. Second, much like it takes a long time to see the results when you try to get physically fit, it takes a while for your efforts to gain momentum and have a tangible impact on your score.
Most financial experts recommend that you check your report at minimum once a year to confirm that the information on it is accurate and that you don’t spot anything that you don’t recognize. However, if you’re working actively on raising your credit score, it’s probably worth checking in once every 30-60 days to see how you’re progressing with reaching your goal.
What should I do if I see some activity on my credit report that I don’t recognize?
One of the reasons that it’s so important to check your report on a semi-regular basis is that viewing your credit report is one of the only ways (if not the only way) to definitively tell if you’ve been a victim of identity fraud or not. If an experienced or savvy criminal uses your information to apply for loans or credit cards without your knowledge, you may never receive any correspondence from their lenders about it that might otherwise tip you off. However, if your name or social insurance number has been used, there’ll be a record of it on your credit report.
If you check your credit report and do see some activity that you don’t recognize, stay calm and first do a thorough look-back through your records to confirm it wasn’t you. If you still can’t identify the activity, you’ll need to report it to the credit reporting bureau as fraud ASAP. Depending on if the fraud is actively happening or it looks like it happened some time ago, you may want to freeze or lock your credit until the issue is resolved. This will mean that you can’t personally use credit until your credit is unlocked, but neither will anyone who’s been using your identity. Filing a police report about the fraud is also important, and might also help you reverse the negative effects that the fraud might otherwise have on your credit score.
I just checked my credit score and it’s lower than I expected it to be. How can I raise it?
One of the nice things about credit is that because it’s a fluid figure that’ll change throughout your life, meaning you have the ability to try and improve yours if you don’t like what you see. Again, there’s no way to definitively determine how your actions will change your score because of the lack of information about the formulas, but there are some tried-and-true methods that most financial experts recommend if you find yourself seeking a higher score.
Though your credit score is made up of a number of different components, your debt payment history is going to have the biggest impact on your credit score overall. If you’ve got outstanding debt or loans of any kind, focus on getting those paid off as soon as you can. If you’ve got a large amount of debt that can be consolidated, that will help! Once you do have your debt paid down, keep in mind that it’s favourable to pay your bills in their entirety when you get them instead of carrying a balance. Beyond that, many financial experts would recommend that you try to utilize 30% or less of your credit on a regular basis. Resting well below your credit limit on a regular basis is important to display that despite the fact you have a large amount of credit afforded to you, you don’t regularly need to use it all to stay afloat.
Keep your hard inquiries to a minimum. It’s also important to remember that when it comes to credit, time is your friend. Having credit accounts that have been open over a long-term time frame is seen as more favourable than having a number of new credit accounts.
Finally, checking your score on a semi-regular basis or using a credit-monitoring service will help you track changes and identify how much of an impact your actions are having as you try to improve your score. Being regularly aware of what your score is sitting at will help you determine if the actions you’re taking are helping or not, as you’ll have a clear level of feedback to work with.
Final Thoughts on Credit
Many people often find out they have worse credit than they’d expected when it’s too late - they’re already in the process of applying for a mortgage, they’re trying to get approved for a car loan or they can’t seem to rent an apartment anywhere. While this isn’t explicitly “too late”, what we’re trying to say is that you should be well aware of where your credit stands at present so you can make changes if you need to. If you know your credit needs work and you have financial goals that are going to involve using it, putting in the work to make improvements today will make reaching them possible!