Everything you need to know about monitoring and building your credit score in Canada.
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Your credit score is calculated based on a complex statistical algorithm using the information found in your credit report.
Your credit contains information reported by your creditors on a number of different factors, including personal information, payment history, amounts owed, credit limits, and age of the accounts.
The information is then used to generate a score which the lenders use to determine the risk of lending you money.
In Canada, there are two main reporting agencies – Equifax and TransUnion.
Credit scores range from 300 for those new to credit and up to 900 points. According to most lenders, 650 is the benchmark. A credit score above 650 will generally qualify you for regular lending at fair interest rates and a score under 650 will make it harder to qualify and may require less traditional lending at higher interest rates.
Simply put, a higher credit score will give you a better chance of being approved for lending and usually means you will receive a lower rate as you are less likely to default and not pay back the amount borrowed.
Here’s how to understand your credit report.
Each credit facility is reported separately and will be assigned a numerical rating based on your payment history with that lender and a letter rating based on the type of credit.
Numerical ratings are key and are what will ultimately impact your credit score; each account will be rated between 1-9.
1 is the best rating and means paid on time and 9 is the worst rating meaning bad debt, collections or bankruptcy.
The full description of each is below
The letter rating simply indicates the type of account and the two most common are R and I.
R = Revolving credit facility. For example, credit card or line of credit, meaning the borrower can pay down and use the facility up to the credit limit.
I = Installment credit facility. For example, a car loan or a consolidation loan, meaning the credit facility has fixed repayment terms and as the loan is paid down those funds cannot be accessed again.
In addition to the information above, each reporting account will show when the account was opened, the balance, and the credit limit.
Your personal information will also be reported. Full name, address, date of birth, and employment information.
Before applying for any credit, you should first check your credit report and credit score.
Understanding what your credit score is will give a good indication if your credit score meets the criteria for approval. There are other factors outside your credit score which you will be required to meet, but your credit score plays a very important role.
If your credit score is low, it may be advisable to not apply. Numerous credit applications in a short period of time can negatively impact your credit rating.
If your credit report doesn’t match what you put on the credit application, it will usually result in an immediate decline. So ensure all your personal information is up to date and that there are no unpaid collection items.
In Canada, the two major credit reporting agencies provide a free copy of your credit report annually.
The free version will only provide your report, not your score. The report is important to check at least annually to ensure there are no errors in what is reported.
Both Equifax and TransUnion also provide online access to your credit score and report online as well as credit monitoring. These services are charged as either a one-time fee or a monthly subscription.
Review all sections of the credit report carefully.
First, ensure all your personal information is current and accurate, including your address and employment details.
Make sure all the debts and accounts reporting belong to you and the balances are approximately correct. Keep in mind that the bureau isn’t updated daily, so if you have made payments or used the card recently, this may not be reflected.
Checking your credit report regularly not only ensures everything is correct before you apply for credit. It will also flag any signs of identity theft.
If there are errors, you will need to contact both Equifax and Transunion to correct them. The easiest way to do this is by downloading the investigation form from their website, complete it in detail and fax it back with all supporting documents.
When sending in the investigation form, both bureaus will require you to send copies of your picture ID. Once received, you will usually receive a response within 30 days informing you of the outcome of your request and what changes have been made.
If items haven’t been corrected to your satisfaction you should call the reporting agency and find out why and what is needed to make the correction. It may be that additional supporting documents are required.
Yes, the first part is to ensure items are reporting correctly. There may be negative items on your report, but if they are correct and accurate, they can’t be changed.
You will then need to deal with any bad/unpaid debts that are continuing to report negatively. Until these items are cleared up, it will be very difficult to improve your score as these negative items that are continuing to report will keep dragging your score lower.
Once all the information is reporting correctly and you have dealt with any bad debts that were reporting, you will need to start building a positive payment history.
This means obtaining credit and using it responsibly. If you have a poor credit score it might be difficult to obtain credit so you may need to start with a secured credit card.
A secured credit card can be a good option for someone wanting to establish a positive credit rating or rebuild poor or damaged credit.
Typically a secured card is obtained by those that can’t qualify for an unsecured card, usually because of a poor credit rating. The secured card is then used to improve your credit score by creating a positive payment history on a credit facility.
Secured credit cards will require you to provide a security deposit often this will require a minimum of $500. This deposit is generally the same as the credit limit on the card and is provided in case the card isn’t paid.
You use the card in the normal way and make payments the same as a normal credit card. After a number of months of using the card and establishing a positive payment history with the card holder, you can request your security deposit back.
Using and making payments on a secured card will report to your credit bureau’s and help to create a positive payment history. Make sure you make all payments on time otherwise it will have a negative impact. Also, remember you are responsible to make payments and the security deposit will only be used after a significant default period, not to cover a missed payment.
A prepaid card is different than a secured card. A prepaid card isn’t a credit facility and doesn’t report to your credit bureau. You deposit a certain amount on the card and then have that amount to use.
Once the amount deposited has been used, then you need to add more to be able to use the card.
Prepaid cards can be very convenient when making payments required by credit card (i.e. online purchase, car rental, flights, hotels etc) without the worry of going into debt or when you do not qualify for regular credit.
Again, prepaid cards do not report to your credit bureau and will not help establish or rebuild a positive credit rating.
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