Credit is probably one of the most misconceived subjects in the world of lending. I like to think of a credit report like our days in elementary school; our school would issue a report listed with;
- each subject,
- your grade for each subject,
A credit report is no different, in this case instead of the school issuing the report we have 2 major credit bureaus/agencies; Equifax and TrasUnion. They are private institutions that have to follow a set of rules for collecting your personal information and your financial information (from a lending perspective). These two agencies communicate with each company you’ve created an account for credit. Each company has to report to the agencies the following information:
- What product you have with them
- How much the product’s credit limit is
- How much you have borrowed from the product
- How long you have had the product for
- Whether you have made your monthly payment
Now just like you can obtain a grade for each subject in school, you obtain an overall grade which is called your Credit Score. From a basic view your credit score is calculated by three main things:
- Your monthly payment history. This is very easy to keep control of… just make your payments on time! Once you miss a payment after 30 days, it gets indicated on the report. If that same payment goes without payment for an additional 30 days it begins to paint more of a worrisome picture and this keeps going until the lender decides to send the item to collections or writes it off (more on this below).
- How much you have borrowed from the particular product. When you borrow above the 60-70% threshold of a particular product’s credit limit, you are deemed a high utilizing user. This does affect your credit score but the good news is this is easily and quickly fixable. All you have to do is bring the product’s balance below the threshold and within the next credit cycle (usually 30 days) it should update. I have seen clients credit scores dramatically change from low 600’s to high
700’s once they paid off their debts. - How many times you have done a hard credit check. Now one of the misconceptions about credit is that if you check your credit, it impacts your credit in a negative way. This is partially true. There are two different types of checks, a soft check and a hard check. A soft check is done when Equifax/TransUnion or the institutions you have given permission to, pull your credit for informational purposes. A hard check is completed when you are actively applying for products despite who does the hard check. A hard check is the type of check that impacts your credit score, however, if you are occasionally doing a hard check (once every 4-6 months), the overall impact is minimal. If you are hard checking your credit at multiple institutions within the same period of time, this is where your score begins taking a hit and will take time to recover.
That’s it? Well, for the most part, yes. However, there are other things that affect your credit score:
- How long you have established credit for. It’s always good to have some form of credit as soon as you are able to have it (age of 18). The longer your history with credit the more positive impact it will have.
- Whether you successfully paid off a loan with its instalments. I have noticed myself with clients who have taken out car loans and paid them over the term, they typically have higher credit scores. It showed they were able to commit to a fixed schedule for a loan, make their payments and finish the loan. This has a positive impact on your credit.
- If an item was sent to collections or a lender writes off your debt. This indicates that you were not up-to-date with your monthly payments and measures were taken to retrieve the money borrowed for the lender. While you can fix this by contacting the lender or collections agency and paying the debt that was written off so they will report to the credit agency, the fact it got to that point will still remain on the credit bureau. It is always better to rectify this where you can than to leave it alone thus resulting in a positive impact while still having the blemish.
Now what are some secrets to the credit world?
- Accept credit increases from pre-approvals. Pre-approvals are an indication you’re on the right track.
- Don’t be afraid to have a balance on your credit (provided you have a plan to pay it back!). This will establish how you do in the scenario you have credit. If you just have a credit card and don’t use it, how will your credit agency be able to determine your credibleness?
- Check your credit scores regularly. Sometimes without you knowing something could fall behind or that modem you borrowed from your internet service provider might not have been scanned in properly. It’s best you monitor your credit to prevent any misunderstandings!
How can you check your credit? Contact your Equifax or TransUnion.
TransUnion Canada:1-866-525-0262. www.transunion.ca or register for CreditKarma (hyperlink:
https://www.creditkarma.ca/signup)
Equifax Canada: 1-800-465-7166. www.equifax.ca or register for myEquifax or Borrowell