13 Nov Understanding your credit report and debunking some myths
To determine your creditworthiness, a lender needs to know your credit score and does so by checking your credit report with the Equifax and Trans-Union agencies.
These agencies sell credit files to their members, including banks, credit unions and other financial institutions, credit card companies, car rental companies and merchants. They also sell reports to mobile phone companies, insurance companies, government agencies, employers and landlords.
What information is in your credit file?
Your credit report may contain the following personal information:
- Birth date
- Current address and previous addresses
- Current phone numbers and previous numbers
- Social Insurance Number (SIN)
- Driver’s license
- Passport number
- Current employer and previous employers
- Credit cards, merchant or store cards, lines of credit and loans
- Telecommunications accounts, such as mobile phones and Internet accounts
- Negative information on chequing accounts and savings accounts that have been closed by the institution for a valid reason, such as unpaid debt or fraud by the account holder, and bad checks
- Public domain information such as a bankruptcy or court order, and registered items, such as a lien on a car or house that allows the lender to seize property if you do not make payments
- Information on debts transferred to collection agencies
- Inquiries from lenders and other third parties who wish to view your credit report
- Remarks, including consumer statements, fraud alerts and identity verification notes
What is your credit score
The credit score is a three-digit number (between 300 and 900) calculated using a mathematical formula based on the information in your credit file.
You get points for the transactions you make that show lenders that you know how to use credit instruments responsibly, and you lose points for transactions that show you have trouble managing credit.
The credit scores oscillate on a scale of 300 to 900 points, the best score being 900 points.
What is the credit rating
As for the credit rating, it represents the valuation that lenders make of your credit history, in other words if you are a good or a bad payer.
The rating ranges from 1 (best) to 9 (worst). The letter appearing before the figure determines the type of credit contracted, namely O (line of credit), L (installment credit), R (revolving credit).
Have a look at your credit report
Your credit report is updated regularly. However, some studies have shown that some errors may slip in so it is advisable to consult your credit report at least once a year to validate if all the information is accurate because it is with your credit report that a lender will grant you a loan or mortgage, determine the interest rate, etc.
Under the law, negative information can only be included in your credit file for a certain period of time. For most information, it will remain between six or seven years.
Factors used to calculate your credit score
It is impossible to know exactly how many points your score will increase or decrease depending on the actions you take. However, the main factors used to calculate your score are among others:
Here, without a doubt, we have the most important factor. These are the dates on which you paid your bills, late or missed payments, debts that you did not repay and that were written off or transferred to a collection agency, the extent to which you declared bankruptcy.
Use of available credit
When you use a high percentage of your available credit, lenders consider you to be a greater risk, even if you pay your balance in full on the due date.
Try to use less than 35% 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, you have a credit of $15,000. Try never to borrow more than $5,250 (35% of $ 15,000).
The period covered by the credit history
The longer your account has been open and used, the better it is for your credit score.
The number of inquiries or interrogations
Be aware that too many inquiries about your file may cause doubt in the minds of lenders. This may give the impression that you are desperately seeking credit or trying to live beyond your means, without being able to repay the money you want to borrow.
Types of credit
It is preferable to hold several types of credit, for example a credit card, a car loan, a line of credit or some other kind of loan. Owning a second credit card of a different type, such as an account in a store, may even be beneficial to you.
Tips to improve your credit score
- Always make payments on time. If you can not pay the full amount, make at least the minimum payment.
- If you think you will have trouble paying an invoice, contact the lender immediately. See if you can make special arrangements to pay off your debt.
TRUE OR FALSE
Regarding credit files , there is plenty of false information in circulation:
Checking your credit report penalizes you
FALSE – Consulting and applying for credit is not at all the same thing. Furthermore, it is recommended to consult your file regularly to be able to correct any false data if necessary or to detect any fraud.
Paying all your accounts and loans on time guarantees a high credit score
FALSE – This good habit counts for about 30% of your credit score.
The accumulation of several debts or a high debt, close to or above the standards of repayment capacity, is considered a time bomb by lenders and creditors.
Religiously pay the minimum amount required from your credit card guarantees a high credit score
FALSE – The credit card balance must be paid in full by the due date indicated on the statement of account. Otherwise, you are considered a rash borrower since you borrow on a 19% card rather than a personal margin at 8%.
Paying the minimum balance on your credit card after the due date does not influence the credit rating
FALSE – Even if it’s twenty-four hours, a delay is a delay. The credit file is powered by computers, whether you owe $2 or $2,000,000.
Paying cash favors a good credit record
FALSE – A credit file is built based on your payment history. Since cash purchases are not listed there, they cannot contribute positively or negatively to your score. It may be better to use a credit card and simply pay off the balance before the due date.
In addition to potentially benefiting from the advantages (point systems, guarantees) offered by issuers and not paying interest charges, you demonstrate sound management of your payments.
Paying a debt erases it from your credit report
FALSE – It’s on your file for years and you cannot make a change. Only incorrect information, whether it relates to credit history or your personal information, is removed or corrected with supporting evidence.
A big income positively influences the credit rating
FALSE – Even rich people are denied loans.
The credit score is not set according to your income (salary, investments, etc.) but according to your credit history. Only the lender will consider your income, especially for large loans.
Bankruptcy destroys your credit report
FALSE – You will be assigned a rating of R9 (the worst), that’s all. It will be registered in your credit file for seven years.
But many bankrupt clients rebuild their credit in the first year after the release of bankruptcy.
It is impossible to oppose a note from a creditor registered in your credit file
FALSE – If you find this information inaccurate, incorrect or unfair and the creditor refuses to make a correction, you can add your own explanatory note.
Making several credit applications downgrades your credit rating
TRUE – Even if one or many of these requests are accepted. Avoid shopping for loans and mortgages with too many lenders and limit the number of credit cards in your portfolio to two.
Improving your credit habits increases your credit rating
TRUE – If you go from being an unruly to a good payer, your rating will certainly go up.
Your file disappears after seven years
TRUE – A bankruptcy registration disappears from the credit bureau after 7 years. Other information also disappears after 3, 5 or 6 years. The standards are not the same between Equifax and Trans-Union.
To switch supplier does not affect your credit report
FALSE – You switch from Bell to Videotron, you make a mortgage prequalification, you ask for a new card or change your credit card, you increase your limit, you buy a financed vehicle, all this information is recorded in your file.
To refuse to pay a cell account does not affect your credit report
FALSE – All payments and non-payments of cellular bills are systematically reported to Equifax and Trans-Union agencies.
Jackie Beaudoin, Leclerc Insurance and Financial Services
Sources: Office de la protection du consommateur du Québec, Multi-Prêts Hypothèques