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Credit Scores: What you need to know

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    What Is Credit ReportCredit reports and credit scores are important for a number of reasons. However, many people are unfamiliar with how they work. Credit reports are maintained by the major credit bureaus in Canada: TransUnion and Equifax. These reports contain information on every loan you have taken out in the last six years, how often you pay your debts, how much you owe, the credit limit on each of your accounts and other important financial information. A credit report is considered a “snapshot” of your credit history. It is meant to represent your financial status at this particular moment in time. The information in your credit report is used to calculate your credit score. A credit score is a three-digit number. The exact calculation used to determine these scores is kept secret by the credit bureaus. Scores range between 300 and 900 and the higher the score the better. In general, higher credit scores represent a lower risk to lenders, so lenders are more likely to offer loans and favourable interest rates to people who have higher credit scores. While the formula used to calculate a credit score isn’t known exactly, the different information used to calculate the score is.  

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    Information Used to Calculate Credit Scores

    One of the most important factors is how often you pay your bills on time. Your payment history is a big part of your credit score. Lenders want to know that, if you borrow money or use credit, you are likely to make your payments on time. Other information that is a part of your credit score includes the amount of debt that you have, the types of accounts, the length of your credit history, how many credit inquiries are on your report and other information. In general, lenders want to see that you have a proven history of borrowing reasonable amounts of money and using reasonable amounts of credit and that you have shown that you can pay these debts back on time.

    Improving your Credit Score

    Once you know what factors go into the calculation of your credit score, you can attempt to figure out how to improve your credit. As you can see, borrowing money and paying it back on time is important. Therefore, if you hope to improve your credit score, you’ll need to show that you can do this. This means that you’ll need to pay your bills on time. Missing bill payments can seriously hurt your credit score. Therefore, it’s important to always pay bills as they become due. Doing so consistently for a long period of time will show lenders that you can borrow money and use credit responsibly. This will improve your credit score over time and make it more likely that you will be able to get favourable loans and interest rates.

    If you Cannot Pay your Bills on Time

    If you find that you cannot pay your bills as they become due, there are several options for you. The first is to review your expenses and see where you can make cuts. For some people, reducing the amount they spend each month on non-essential items like clothing, restaurants, electronics, cable bills, etc. can put them in a position where they have enough money leftover to pay their bills each month. However, for other people, making cuts still doesn’t help. In these cases, speaking to a licensed trustee in bankruptcy may be the right action to take. A trustee can review your financial situation and provide you with information on the options that are available to you that could help you reduce or eliminate your debt. Most trustees offer the initial consultation and review for free. Once you’ve spoken to a trustee, you’ll have the information you need to make an informed choice for your financial future. While options like a consumer proposal or bankruptcy are noted on your credit report, it’s important to consider the situation you are in. If filing a consumer proposal or bankruptcy makes sense for you, you have likely already missed payments or made debt payments late. This means that your credit score has likely already been negatively impacted by your situation. Taking steps to reduce or eliminate your debt can put you in a position where you can rebuild your financial life and improve your credit score over time.  

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