Credit Report/Score Basics

What is a Credit Report?

Your credit report is a summary of your credit history. If you have ever used a credit card, taken out a personal loan, or used a “buy now, pay later” offer, you have a credit history.

Your credit report is created when you borrow money or apply for credit for the first time. Lenders send information about your accounts to the credit reporting agencies. Your credit report also includes personal information that is available in public records, such as a bankruptcy.

Your credit report contains factual information about your credit cards and loans, such as:

• when you opened your account
• how much you owe
• whether you make your payments on time
• whether you miss payments
• whether you go over your credit limit.

Mobile phone and Internet accounts may be reported, even though they are not credit accounts.

Chequing and savings accounts that have been closed “for cause,” due to money owing or fraud committed by the account holder, can also be included.

What is a credit score?

A credit score is a three-digit number that is calculated using a mathematical formula based on the information in your credit report. You get points for actions that demonstrate to lenders that you can use credit responsibly. You lose points for things that show you have difficulty managing credit.

In Canada, credit scores range from 300 to 900 points. The best score is 900 points.

Lenders and credit reporting agencies produce credit scores under different brand names, such as Beacon, Empirica and FICO®.

Your score will change over time as your credit report is updated.

Businesses use your credit report and score to see how risky it would be for them to lend you money. It is up to each lender to decide on the lowest score you can have and still borrow money from them. Lenders may also use your score to set your interest rate and credit limit. If you have a high credit score, you may be able to get a lower interest rate on loans, which can save you a lot of money over time.

While they are very important, credit scores are usually not the only thing a lender will look at. Often, they will also consider other factors, such as your income, job or any assets you own.

How To Improve Your Credit Score

The actual formulas used to calculate credit scores are the property of private companies and are not available to the public. This means it is not possible to know exactly how many points your score will go up or down based on the actions you take.

However, the main factors that are used to calculate your score include:

• Payment history
• Use of available credit
• Length of credit history
• Number of inquiries
• Types of credit

1. Payment history

This is the most important factor for your credit score. It shows:

• when you paid your bills
• late or missed payments
• debts you did not pay that were written off or sent to a collection agency
• whether you have declared bankruptcy.

Your score will be damaged if you:

• make late payments—the longer it takes you to make your payment, the worse the impact on your credit report and score will likely be
• have accounts that are sent to a collection agency
• declare bankruptcy
• withhold payments due to a dispute and the lender reports your payments as late.

With certain financial products, any payments you make on time will not be counted and will not improve your credit score. However, if you miss payments and your account is sent to a collection agency, this can be included and will damage your credit score. These products include:

• chequing and savings accounts
• student loans
• prepaid cards (these are not the same as secured credit cards).

Telecommunications accounts, such as mobile phone and Internet, are exceptions. Payments you make on time as well as late payments may be considered for your credit score.

2. Use of available credit

This is the second most important factor. It is also called “credit utilization.”

To figure out your available credit, add up the credit limits for all your credit products, such as credit cards, lines of credit and other loans.

What counts toward your credit score is how much of your available credit you actually use, not your credit limits by themselves.

When you use a large percentage of your available credit, lenders see you as a greater risk, even if you pay your balance in full by the due date.

3. Length of credit history

The longer you have had an account open and used it, the better it is for your score.

Your credit score may be lower if:

• you have credit accounts that are relatively new
• you close your older accounts and your remaining credit accounts are newer—for example, if you close a credit card account and transfer the balance to a new card.

4. Number of inquiries

When lenders and others ask a credit reporting agency for your credit report, it is recorded as an inquiry. This usually happens when you apply for credit.

It is normal and expected to seek credit every so often. But if there are too many inquiries on your credit report, lenders may be concerned. It can seem like you are desperately seeking credit or that you are trying to live beyond your means without the ability to pay back the money you want to borrow.

“Hard hits” versus “soft hits”

Inquiries that are recorded on your credit report and count toward your credit score are sometimes called “hard hits.” Anyone who views your credit report will see these inquiries. An application for a credit card is an example of a “hard hit.” Rental and employment applications may be treated as “hard hits”.

“Soft hits” are the opposite. Only you can see “soft hits.” These inquiries do not affect your credit score in any way. Examples of “soft hits” include:

• requesting your own credit report
• businesses asking for your credit report to update their records about an existing account you have with them. They do this to see whether you qualify for promotions, credit limit increases and so on.

Will shopping around for a car or mortgage hurt my score?

When you are shopping around for a car or a mortgage, try to do it within a two-week period. All inquiries related to auto or mortgage loans made during this time are usually combined and treated as a single inquiry.

5. Types of credit

Your score may be lower if you only have one type of credit product, such as a credit card.

It is better to have a mix of different types of credit, such as a credit card, auto loan, line of credit or other loan. It can even help if you have a second but different type of credit card, such as an account with a store.

Tips to improve your credit score:

• Having a mix of credit products could get you more points, but don’t go overboard! Make sure you can afford to pay back any money you borrow. Otherwise, you could end up hurting your score by taking on more debt than you can handle.
• Limit the number of times you apply for credit in a short period of time. It is a good idea to seek credit only when you really need it.
• Consider keeping an older account open even if you no longer need to use it, especially if there is no annual fee. Use it from time to time to keep it active.
• Try to use less than 35 percent of your available credit. For example, if you have a credit card with a limit of $5,000 and a line of credit with a limit of $10,000, your available credit is $15,000. Try not to borrow more than $5,250 at any time (35 percent of $15,000).
• Always make your payments on time. If you cannot pay the full amount, make at least the minimum payment. If you think you will have trouble paying a bill, contact the lender right away. See if you can work out a special arrangement to repay your debt.

For more details please read the Financial Consumer Agency of Canada document: Understanding Your Credit Report and Credit Score.

Source: Financial Consumer Agency of Canada