Today’s economy runs on credit. So, if you want to get a mortgage for a house or a student loan to pay for college—or if you wish to charge your lunch on a credit card—you’ll need lenders.
Your creditworthiness is defined by your three-digit credit score and is the key to your financial life. Good credit can be the make-or-break detail determining whether you get a mortgage, car loan, or student loan. On the other hand, bad credit will make getting a loan or credit card with a low-interest rate difficult and make it more expensive to borrow money for any purpose.
Good credit can significantly impact you even if you’re not in the market for a loan. Landlords, insurers, and employers frequently use credit information as a litmus test to see if the people they’re dealing with are reliable and responsible. Conversely, bad credit can suggest you’re a risky bet.
The credit bureaus calculate your credit score after considering several factors like payment history, credit exposure, credit mix, credit inquiries, and the length of credit history. Your credit score measures your creditworthiness and is used by banks and financial institutions to determine your chances of repaying your debts. Credit scores typically fall between 300 and 900.
Who creates your credit report and credit score?
In Canada, two credit bureaus – Equifax Canada and TransUnion Canada – maintain these numbers for every Canadian.
These private companies collect, store, and share information about how you use credit. Equifax and TransUnion only collect information from creditors about your financial experiences in Canada. However, some financial institutions may be willing to recognize a credit history outside Canada if you ask them.
How is a credit score computed?
While every credit bureau has its model when it comes to calculating a credit score, there are certain constant factors that every credit bureau takes into consideration:
- how long you’ve had credit
- how long each credit has been in your report
- if you carry a balance on your credit cards
- if you regularly miss payments
- the amount of your outstanding debts
- being close to, at, or above your credit limit
- the number of recent credit applications
- the type of credit you’re using
- if your debts have been sent to a collection agency
- any record of insolvency or bankruptcy
Lenders set their own guidelines on the minimum credit score you need for them to lend you money.
If you have a good credit score, you may be able to negotiate lower interest rates. However, when you order your credit score, it may be different from the score produced by a lender. This is because a lender may give more weight to certain information when calculating your credit score.
How do you access your credit score?
You can request your credit report by mail, online, fax or phone. You’ll need to complete an application and confirm your identity by providing photocopies of your ID.
You can contact the agencies by phone:
- Equifax: 1-800-465-7166
- TransUnion: 1-800-663-9980
Here are the forms you'll need to complete if requesting your credit report by mail or fax:
You’re entitled to one free credit report by mail each year. If you’re not willing to wait for the mail, you can access your credit report instantly online, however, you’ll have to pay a fee. The paid report includes your credit score, but the free mailed version is a credit report without your credit score.
How do you improve your credit score?
Improving your credit score can be easy once you understand why your score is struggling. It may take time and effort but developing responsible habits now can help you grow your score in the long run.
Let’s look at ways to earn a healthy credit score:
1. Pay all your bills on time:
If you want to improve your credit score, the most critical thing you must do is ensure you pay every single bill you have on time and in full. No exceptions. Every late or missed payment, no matter how small, negatively impacts your credit score. Conversely, every bill paid on time and in full improves your credit score. This doesn’t mean one on-time payment offsets one late payment either. Creditors want to see a long pattern of bills paid on time, in full.
2. Keep your credit utilization under 30%
Credit utilization is a key factor in determining your credit score. It gauges your ability to manage credit by dividing the sum of your outstanding credit card balances by the sum of your available credit. For example, if you have two credit cards with $5,000 limits and a balance of $2,500 on each card, your credit utilization is 50%. However, if you’re constantly maxing out your cards, your credit utilization is 100%, and that’s not good. Therefore, it’s vital that you keep your credit card balances low (preferably under 30%). It means paying off more than your minimum monthly payment or, if possible, paying it all off.
3. Apply for credit selectively
Anytime you apply for new credit, lenders will ask your permission to see your credit report to check your eligibility. This is called a hard inquiry. However, too many hard inquiries in a short period can reflect poorly on your credit report because it can indicate financial hardship. Therefore, it’s wise to only apply for loan products that are most essential and beneficial to your personal finances.
4. Keep a healthy credit mix
A healthy combination of instalment (one-time loans you make monthly payments on) and revolving credit indicates sound money management. In addition, institutions have more confidence in lending to borrowers who prove they can maintain a diverse mix of credit (car loans, personal loans, mortgages, credit cards, etc.) This is why experts will tell you not to cancel unused credit cards, as it affects your credit history and could diminish a well-balanced credit mix.
5. Be vigilant about errors
Mistakes do happen in credit reports. You should get a full report at least once a year (or monitor it regularly with other tools) to scan for any errors or signs of identity theft.
6. Consider keeping old accounts
The age of your accounts (i.e., how long you’ve been borrowing the money) counts for about 15% of your overall credit score. While this doesn’t mean you should keep high-fee credit cards that you don’t use, it might be worthwhile holding on to an old credit card on which you’ve had a positive credit history.
If you have no credit score or want to rebuild your credit, you can explore secured credit cards to help you get in the range you want.
Who can see and use your credit report?
Credit bureaus follow rules that define who can see your credit report and how they can use it.
Those allowed to see your credit report include:
- banks, credit unions, and other financial institutions
- credit card companies
- car leasing companies
- retailers
- mobile phone companies
- insurance companies
- governments
- employers
- landlords
These businesses or individuals use your credit report to help them make decisions about you. These decisions could be to:
- lend you money
- collect a debt
- consider you for rental housing
- consider you for a job
- provide you with insurance
- offer you a promotion
- offer you a credit increase
A lender or other organization may ask to “check your credit” or “pull your report." When they do so, they are requesting to access your credit report at the credit bureau. This results in an inquiry into your credit report.
Lenders may be concerned about too many credit checks or inquiries in your credit report. It can seem like you're:
- urgently seeking credit
- trying to live beyond your means
Consent and credit checks
In general, you need to give permission or consent to a business or individual to use your credit report.
In the following provinces, a business or individual only needs to tell you that they are checking your credit report:
- Nova Scotia
- Prince Edward Island
- Saskatchewan
Other provinces require written consent to check your credit report. For example, when you sign a credit application, you allow the lender to access your credit report. Your consent lets the lender use your credit report when you first apply for credit. They can also access your credit at any time afterward while your account is open.
In many cases, your consent lets the lender share information about you with the credit bureaus. This is only the case if the lender approves your application.
Some provincial laws allow government representatives to see parts of your credit report without your consent. This includes judges and police.
Take the right steps to build or rebuild your credit score
Your credit score is fluid. For better or worse, all of the items mentioned in this article affect your score each month. But with dedication and attention, you can increase your score and keep it high. Maintaining a good credit score is one major marker lenders use to assess your financial health. The higher you rank, the better your access to affordable credit, which means being likely to qualify for the best rates for products such as mortgages, lines of credit, and auto loans, putting more money in your pocket to pay off loans sooner or achieve your goals faster.