Your credit score and your credit report are important pieces of financial information. Most people know that these reports are important, but many aren’t aware of how a credit score is calculated or what information is contained in a credit report. Anyone who has ever borrowed money in Canada or who has ever applied for a credit card has a credit report. Lenders send information about your accounts to the credit reporting agencies. In Canada, the two major credit bureaus are TransUnion Canada and Equifax Canada. They take the information they are provided, add it to your credit report and use it to calculate your credit score.
What is a Credit Report?
A credit report is a summary of your credit history. It is considered a “snapshot,” meaning that it represents the current moment in time. Lenders use this report to evaluate you based on your past performance. The information contained in your credit report helps lenders decide how likely you are to successfully repay a loan based on your history. They then use this information, along with other information, to determine whether or not they will give you a loan and, if they do, what interest rate they will offer you. A credit report contains information on every loan you’ve taken out in the last six years. It also includes details of how much you owe, whether you regularly pay on time, your limit on each account and a list of authorized credit grantors who have accessed your file.
What is a Credit Score?
A credit score is a three digit number that credit bureaus calculate based on the information in your credit report. In Canada, credit scores range from 300 to 900 points. The best score is 900. The average credit score in Canada is around 700.
The exact formula bureaus use to calculate credit scores is kept secret. However, the factors that influence a credit score are known. Credit score factors include:
- Your payment history
- Your debt ratio
- Your credit history
- The types of credit that you use
- When you have applied for new credit
All of these factors are important. However, your payment history is generally considered the most important factor. Lenders like to see that you have been able to successfully borrow money in the past and pay back this money on time. Therefore, paying your bills on time is crucial to having a good credit score. Your credit score will be damaged if you make late payments. In fact, the longer it takes you to make a payment, the worse the impact on your score. Your credit score will also be damaged by debts that were sent to a collection agency or written off.
Repairing your Credit Score
If you have missed payments in the past, have a large amount of debt or have a bad credit score for any reason, it can be difficult for you to get loans in the future. It can also raise the cost of borrowing since lenders may charge you a higher interest rate when they do offer you a loan. The good news is that a credit score can be rebuilt over time. This is done by paying your bills on time, avoiding using too much credit on a regular basis and not applying for too much new credit. If you want to improve your credit score, you will need to come up with a plan that allows you to pay your debts on time as they become due. However, if you already have a high amount of debt, you may want to consider speaking to a trustee in bankruptcy for some guidance. Some people believe that speaking with a trustee in bankruptcy will damage a credit report forever. However, if you are having debt troubles, you likely already have some negatives on your credit report. Your credit score will be quite low if you have routinely missed payments or if you have taken on a very high amount of debt relative to your income and expenses. Speaking to a trustee can help you understand the options that are available to you that can eliminate your debt. Once your debt is under control, you can start to rebuild your credit rating. It’s important to remember that repairing a damaged credit score takes time. It cannot be done overnight. Beware of companies that promise to “fix” your credit score for a fee. This is not possible.