You may not think about your credit report on a daily basis, but it’s a very important part of your personal finances. A strong rating/score on your report can open up doors for you and make lending much easier. On the other hand, a low rating/score can leave you scrambling behind everyone else.
It’s good to protect your credit rating and credit score as best as you can. Read ahead to find out exactly how you can bring them up in the rankings and keep them there from now on.
Credit Report 101:
First things first, you should read this basic overview of credit reports, ratings and scores. You don’t want to open up your report and stare down at the results, not knowing what any of it means. Knowledge is power.
What Is Your Report?
So, what is it? Your credit report is a record of your personal finances with a direct focus on your credit use. It’s meant to reveal how you’ve managed to repay your loans over the years. If you’ve been prompt about repayment and responsible about borrowing, your report will likely reflect those positive qualities. On the other hand, your report will reveal if your repayment history has been difficult and unpredictable.
These are some of the things that your credit report looks at:
- Personal identification (your name, address, birth date, Social Insurance Number)
- Public record information (information like mortgages, vehicle loans, bankruptcies and collection actions)
- Transaction information (details about your credit use and payment)
- The history of credit inquiries (how many times people have looked into your credit file in the past three years)
- Third-party collection agencies (whether your debt was sent to a collection agency and what happened from that point)
Your report can also include consumer statements. These are comments that you can add to your file. People usually add statements that explain their credit situation. This gives people the opportunity to make themselves look more favourable to lenders, employers and other institutions that need to investigate their credit history.
Why Is It Important?
Your report exists to help lending institutions like banks know whether you should be considered a lending risk or not. It lets them know whether they should accept applications for loans, offer you lower interest rates or give you higher lending limits. All of these factors can be determined by the numbers sitting on your report.
There are lots of negative side-effects of bad credit reports like having a hard time getting approved to rent an apartment or having to put down security deposits every time that you change utility providers. So, not only will it make life more expensive, but it will also make it harder for you to get upward momentum. Milestones, like buying a car or getting a mortgage, will be pushed further and further away from your reach.
How Do You Get It?
You can access your credit report through a credit reporting agency. The two main agencies in Canada are Equifax and TransUnion. For free, you can order it from one of these agencies by mail or by phone. If you want to access it online, you may have to pay a small fee. There are secondary companies like Credit Karma and Ratehub that will help you access your credit score through these two large agencies.
When you get the report, you will be able to see both your credit rating and your credit score. You can order your credit score on its own. You will only receive a number — not the rest of that vital information.
What Is Your Credit Score?
At the top of your report, you will see your FICO score. A FICO score is a credit score created by the Fair Isaac Corporation. It’s commonly used for consumer credit reports by agencies across North America. FICO scores typically range between 300 and 850 — in some cases, the range goes up to 900 — with the highest numbers being rated as the best.
The scores are divided into categories of Excellent/Exceptional, Very Good, Good, Fair and Poor. Here is how the FICO scores are usually classified:
- Excellent/Exceptional: 800 and above
- Very good: 740 to 799
- Good: 670 to 739
- Fair: 580 to 669
- Poor: Below 580
Every credit agency will come up with different results for your credit score. Sometimes the difference between your results is small. And sometimes, your score from two agencies will lump you into two separate categories: one can label you as “Good” while the other puts you into the “Fair” section. Take a look at this CBC Marketplace investigation where three Canadians received four completely different credit scores from Equifax, TransUnion, Credit Karma and Borrowell.
What’s the Average Score?
Now, the average Canadian’s credit score is around 600 — you can see that it’s not very close to the excellent/exceptional range. The good news is that there is more information available about how to understand your credit reports and what you can do to build up your overall score. Years ago, this information would have been difficult to find outside of a financial institution. With internet access, more citizens have the opportunity to improve their numbers and jump into higher categories.
Some experts believe this increased access to information has helped out younger generations with their scores. The average credit scores of millennials and older members of Generation Z is 692 — this is in the “Good” category. However, this higher score could also indicate that these young Canadians have yet to encounter certain responsibilities and roadblocks because of their age. They are less likely to own a house and carry a mortgage. They are less likely to have children and dependents. All of these things impact your personal finances, and in turn, your credit score.
What Is a Credit Rating?
Your credit rating will be a letter (“R,” “O” or “I”) and a number beside it. It’s meant to show what type of credit you’ve dealt with and how well you managed to pay it off. If you’ve wondered what is your R score or O score, look below for the simple explanations.
This is what the letters stand for:
- “R”: Revolving Credit. The user makes regular but different-sized payments, depending on the balance in the account. They can borrow more money when they need it, up to their credit limit. Example: credit card.
- “O”: Open Credit. Money is borrowed when it’s needed, and then a balance is due by the end of the loan period. Example: a line of credit.
- “I”: Installment Credit. Money is given and repaid in regular installments until it’s complete. Example: a car loan.
This is what the numbers stand for:
- 0: Credit has been approved, but still too new for credit ratings
- 1: Pays within 30 days of billing
- 2: Pays within 30-60 days of billing. One or more payments could be past due
- 3: Pays within 60-90 days of billing. Two or more payments could be past due
- 4: Pays within 90-120 days of billing. Three or more payments could be past due
- 5: Account is typically over 120 days past due
- 6: The code does not exist
- 7: The payments are being made under a consolidation order or some type of similar agreement
- 8: Repossession
- 9: Collections because of bad debt
You can find out more about the credit rating & credit history that you will see on your official report by clicking on the link.
What Hurts Your Credit Score and Rating?
You looked up your report, and the results weren’t amazing. Now, you’re wondering how you got into the lower category in the first place. Here are some of the things that will damage your credit score and rating over time.
Irresponsible Credit Use
Essentially, treating your credit card as a consequence-free tool is not a good decision. People that max out their cards or maintain steep balances give off the impression that they are spending beyond their means and not in control of their finances.
A history of missed or late payments will negatively affect your credit report. It will make lenders think that you’re inconsistent and that you can’t be trusted with repayment.
Filing for a consumer proposal, division 1 proposal or personal bankruptcy will affect someone’s credit report. These methods help people who are struggling with outstanding debts, so they will already have a difficult time maintaining good credit scores/ratings anyway.
An error on your report could be hurting your results. It could be something as simple as listing a closed account as open or a paid loan as unpaid.
The worst cause for the poor results could be identity theft and fraud:
- Identity theft: when someone steals your personal identification for nefarious purposes.
- Identity fraud: when someone uses that stolen identification to make financial decisions without your knowledge.
In 2018, the Canadian Anti-Fraud Centre reported that 9,657 Canadians filed for complaints of identity theft and a total of 29,020 filed complaints of identity fraud. A person could use your personal information to make expensive purchases, take out loans and even open new accounts right under your nose. Naturally, this will have a lasting effect on your credit.
If you’re worried that you could be a victim of one of these crimes, you should click here to see the signs of identity theft on Ontario’s official website.
What Will Help Your Credit Score and Rating?
Understanding how you got a not-so-exceptional score/rating is a good start. After figuring out what’s wrong with your report, you can follow these important steps to move your results into a more desirable category.
Don’t Get a New Card
It might sound unbelievable, but opening another account can hurt your credit more than help it. So, focus on the credit cards that you already have instead of adding a brand-new card into your wallet. If you must get a new card, try to get one that provides cash-back rewards. This could make it easier to make your bill payments down-the-line.
One of the easiest changes to make is to pay your bills early or on-time. Late or missed payments will take a significant toll on your report. You should write the dates in your calendar or daily planner to help you remember. Or, you can use online banking to set up automatic bill payments.
More Than the Minimum
Always try to pay more than the minimum amount. Tackling your balance $10 at a time will not make much of an impression on your report. Try paying more than the minimum for your credit card bills.
Pay Off Your Debt
Outstanding debt will impact your results, so one of the best things that you can do is pay it off as soon as you can. If you can manage to tackle this goal with your current budget, make the payments right away. If your current budget is too tight, you should click the link to see how to reduce your expenses to make paying off your debt much more manageable.
Get Professional Help
Managing your credit can be very hard. If you’re feeling overwhelmed, you can always come to David Sklar & Associates to get professional help for your specific financial problems. We have credit counselling services. The counselling sessions can show you how to budget your money wisely, use credit cards responsibly and handle your debt load. And, if that’s not enough, you can turn to our licensed insolvency trustees to get debt relief options like consumer proposals or personal bankruptcy filings.
And one of the most important things that you can do is to keep pushing forward. Don’t give up on these steps. Your credit report won’t change overnight. The longer that you stick to these steps, the better it will get.
As you can see, your credit report can have a big influence on your life. It can affect your ability to get a car, a house or even a good cell phone plan. To make these moments in your life easier, you should try to move your credit score and rating to a higher category and then protect that spot from now on.
Residents of the Greater Toronto Area have had their lives turned upside-down by the pandemic of COVID-19. Here at David Sklar & Associates, we understand that many residents have been thrown into financial instability because of this health crisis and are concerned about what to do next. If you need financial help, we are still here for you. We offer over-the-phone consultations, video consultations, and electronic document signing so that you can access our services from the safety of your home. We want to encourage our clients to prioritize their health as best as they can during these uncertain times.