18 questions and answers to finally understand your credit report and its particularities.
My career as a financial reporter and my long years spent in collections at Desjardins have taught me that credit reports are largely misunderstood. This financial analysis tool is the source of countless myths, even today. Even its name is confusing. Several terms are used interchangeably, sometimes incorrectly, to refer to it, such as credit report, credit bureau, credit file, credit score, and credit rating. To clear up any confusion once and for all, I have prepared this little practical guide for you. How it works, to its impact on your professional life, including the consequences of bankruptcy, you’ll find everything in this article so that you finally have the correct information about your credit report.
1. What is a credit report used for?
A credit report is an analysis tool providing a partial view of your financial situation. I say “partial” because several things are missing from it, such as your income, your savings, any debt to a loved one or details about your purchases.
Those who ask to see your file generally seek to assess the risk of doing business with you. In other words, they want to know if you are trustworthy, financially responsible and the kind of person to honour your commitments.
2. Who prepares your credit report?
In Canada, Equifax and TransUnion are the two agencies that collect your account information from financial institutions, service providers and other businesses. These two agencies then use this information to keep track of your accounts and establish your credit score and credit rating.
3. What information appears in a credit record?
It contains more information than just how regularly you make your payments. It also includes:
- The date the account was opened
- The credit limit
- Its maturity
- The monthly payments
- The balance
- The type of account
- If the account is in collection
And here is a non-exhaustive list of what can also be found on your credit record.
- Requests for consultation of your file
- Certain information related to your job such as your job title, the company and date of hiring
- Legal decisions against you in matters of credit
- Bad cheques
4. Are credit rating and credit scores the same?
The score is an overall score about the quality of your credit report, while the rating represents your account’s status, that is, whether it is up to date, overdue or written off.
The credit score ranges between 300 and 900, from a calculation that takes into account the following elements:
- Payment history (35%): Are you paying your accounts according to the terms? If so, that’s perfect!
- The debt ratio (30%): Are your balances close to your credit limits? If so, it would be better to pay off more.
- The length of your credit history (15%): Have you been using credit responsibly for a long time? If so, it’s much better! If not, it’s time to start building or rebuilding your credit.
- Credit requests (10%): Have you made several financing requests recently? If so, be careful. You’re sending a signal that your financial situation is in bad shape.
- Types of financing (10%): Have you demonstrated the ability to use a variety of financing responsibly? If you have a properly paid credit card, line of credit, car loan, and mobile phone account, you demonstrate the ability to manage your budget.
The rating is a number from 1 to 9 that refers to the status of an account. It is preceded by a letter that is used to identify the type of account.
- R (Revolving): a credit card is a typical example.
- O (Open): a mobile phone account is an example of an open account as your balances are not subject to a limit.
- I (Instalments): Instalment credit is where you have to repay an amount with regular payments, such as a car loan or a personal loan.
- M (Mortgage): Mortgages can be displayed on the credit file.
- 1: Everything is beautiful! You pay on time and have a good credit rating.
- 2, 3 and 4: These are the bad credit scores. They indicate a late payment of 30-59 days (2), 60-89 days (3) and 90-119 days (4).
- 5: The account is more than 120 days overdue, which could lead to a 9 rating (the worst!), but your creditor is giving you one last chance.
- 6 : Code not used
- 7: You have entered into a partial repayment agreement or a special agreement in order to obtain a discharge from the creditor. A score of 9 shows that you have completely failed in your responsibilities, but a score of 7 is a little less serious. Granted, you didn’t live up to your initial commitments, but at least you made an effort to avoid the worst.
- 9: This rating applies to accounts included in a bankruptcy. It is also used when your creditor has lost hope of recovering what is owed to them. They write off the debt and can then “sell” it to a collection agency at a low cost.
5. What do my credit score and my credit rating mean?
For the rating, it’s very simple. If it is not at 1, it is a bad credit rating. Obviously, a score of 2 is better than 3, and much better than 9!
For the score (or credit score), it’s a bit more complex.
741-900: Wow! Congratulations!
You have an excellent score, like about half of all other Canadians. Your good payment habits and responsible use of credit make you look good. In practical terms, this means that you shouldn’t have a hard time obtaining financing at good rates and promotional offers. At least, it’s not your credit record that’s going to get you into trouble.
690-740: Good job!
Your history is not flawless, but the situation is in no way problematic and does not show a worrying “pattern”.
660-689: Not so bad!
You have enough errors in your history for them to be a little more careful with you. With this score, it becomes more difficult to negotiate advantageous interest rates. But…with a healthy dose of financial discipline you should be able to turn everything around quickly.
All is not lost, but the slope to be climbed is considerable. At this point, your “youthful mistakes” and “little oversights” are too numerous to ignore. Can you still get financing? Yes. But the question should rather be: is this really a good idea? Maybe it’s time to get back to basics and resume some healthy financial habits.
We won’t hide it: things are going badly! It could be due to bankruptcy or the accumulation of collection accounts. Information remains on your file for up to 7 years. You will have to review your budget management completely. The sooner you take control of your situation, the sooner you will find the benefits of having a respectable score.
Now that we’ve covered the basics of credit reporting, I’ll answer some of the most common questions on the subject.
6. Will my score be bad if I make a partial payment?
A partial payment is a delay. If you’re unable to make the full balance payment, at least make sure you make the minimum monthly payment.
Not half, not three quarters and not 95% either. For a good credit score, you’re required to pay the minimum monthly payment, or more.
Here’s a typical example I heard frequently from my time in debt collections: “I’ve made partial payments over the past few months, but paid off my entire card balance this month. Why do I have a bad credit score?”
Unfortunately, I could not do anything for them.
7. Is it possible to remove the mention of a delay from the credit report?
Certain situations may justify removing a delay or a negative mention from your credit report. But I warn you; the process can be frustrating and painful, to the point where you feel like you’re stuck in a madhouse. If you believe in the legitimacy of your cause, the endless delays and transfers from one department to another are worth the phone call.When you begin your process, don’t waste time trying to contact Equifax and TransUnion. They will kindly tell you to contact the creditor in question.
Let’s be clear, the chances of a creditor being lenient in the face of late payments are slim, but…
- If it’s an administrative error on their part, make your point at all costs! Even if it means talking to the supervisor’s supervisor or sending a letter to the financial institution’s ombudsperson.
- If you claim to never have received the statements in your mailbox, you’re in luck. A change of address can be confusing after all! However, you should know that this argument has lost its merit since email invoicing became commonplace.
It’s up to you to determine if your arguments are worth hearing, but the fact remains that “early mistakes”, “little oversights” and “difficult times” unfortunately have consequences that can’t be erased by claiming to be a “good payer”.
8. Are your late payments systematically displayed on the credit report?
Over a relatively short period of time, exceeding your payment due date is not necessarily going to result in a bad credit rating. I am far from encouraging budget laziness, but a very slight delay on a credit card or a mobile phone account is no reason to sleep badly at night.
If you missed a payment that is only a few days past due, it is very unlikely that the delay is already listed in your Equifax and TransUnion records. Although it is not explicitly mentioned, most lenders and providers allow additional time before notifying a delay with the credit rating agencies.
Be careful though. These small delays could harm you in the eyes of the organization with which you’re doing business; for example should you seek a limit increase or a reduced interest rate.
9. Does a cheque with insufficient funds impact your credit score?
In addition to being a great way to lose friends and sympathy from your financial institution, a bad cheque may appear on your credit report. So yes, insufficient funds can hurt credit!
Otherwise, transactions made through the bank account and credit card are not listed on your credit report. Whether you spend all of your pay at the casino or on donations to support sick children, the credit bureaus don’t care. As long as you pay your bills on time!
10. Will financial mistakes from your youth haunt you forever?
Youthful mistakes in personal finance will follow you for a long time, but not forever. In Canada, credit bureaus keep information on file for up to 7 years.
11. Are all of your accounts on your credit record?
Not 100% of your accounts are listed by Equifax and TransUnion. Information related to utility accounts, such as electricity bills, and tax accounts does not appear in your record.
But don’t assume that electricity bills can be allowed to pile up without consequence. We agree that having access to electricity is already a big plus, but you’ll also avoid having your debt passed into the hands of a collection agency. When the electric company is too tired to chase you, rest assured that the third party that inherits your debt won’t be shy about showing up on your credit report.
It is also possible that a supplier or business simply does not do business with the Equifax and TransUnion agencies. While this may be good news for those in default, it is much less so for those trying to build or rebuild a good history.
Before financing items with a small furniture store in hopes to improve your credit score, ask the salesperson if the company shares information with Equifax and TransUnion.
12. Does your record indicate whether you have co-signed or guaranteed financing for a loved one? (and as a bonus, an explanation of the debt ratio)
A mortgage signed by two spouses could appear on their respective files, but this is not necessarily the case for other types of financing contracts. Before providing your signature to help a loved one obtain a loan, make sure you have the financial means to possibly become solely responsible for the debt. Because there is one thing you need to remember: when a lender requires a co-signer, it is a sign that they consider the principal borrower to be too risky. They are therefore relying on you to foot the bill in the event of any “complications”. If a company that generates millions in profits is cautious about lending money to your grandfather or cousin, you’d better be careful too.
Do you have too soft of a heart to refuse to lend a helping hand?
To protect yourself, demand that you receive the account statements and make provisions in your budget in the event that the other person defaults. Also make sure that this financing does not increase your debt ratio too much if it appears in your record.
An example to understand the debt ratio:
You have a line of credit and a credit card. Your cumulative balance is $500 over a cumulative limit of $10,000, for a debt ratio of 5%.
You co-finance a $5000 living room set for a loved one that has recently been through difficult financial times.
With this loan on your file, your debt ratio has just increased to 37% ($5500 on a cumulative limit of $15,000), which exceeds the recommended threshold of 30%.
13. Does your score drop when your credit report is consulted?
I don’t recommend it, but if you want to track your credit score daily, indulge yourself! Soft inquiries, that is, requests that are not submitted as part of a financing request, have no impact on your credit score.
But “hard inquiries” can have a negative impact on your score. The logic is simple: a person who has multiple requests for financing over a short period of time sends worrying signals about their financial health.
So if you’re shopping for a mortgage, now is not the time to go for all the credit card offers that come your way.
14. Is it worth paying to get your credit report?
At times, it’s worth paying a few dollars to check your credit report. But if your accounts are up to date and your use of credit is reasonable, spending $20 or so to get your file in detail is futile, for all intents and purposes.
There are two reasons that justify this expense:
- If you’re considering submitting a request for large financing, such as a mortgage or a car loan. By having full access to your file beforehand, you’ll have a clear picture of your financial situation and you’ll have time to correct mistakes or settle old forgotten accounts.
- You’ve lost control of your debt and want to get on top of it. In this case, the credit report becomes similar to the results of a medical exam. It provides you with the information you need to develop the proper “treatment”.
15. Can I obtain my credit rating for free?
In Canada, you have the right to order your Equifax or TransUnion file free of charge once a year. You can also use the free services of Borrowell and Credit Karma for partial access to information in your file.
16. Does bankruptcy reset the counter to zero on your credit report?
Bankruptcy allows you to protect yourself from your creditors and start anew (in a way), but Equifax and TransUnion have long memories (7 years to be precise). Will you have to wait 7 years before you can borrow again? Not likely. For example, a high-income person will usually regain access to credit well before the end of their financial “purgatory”. But let’s be frank. If you’ve declared bankruptcy recently, getting financing may not be what you need right now. Rather, it is an opportunity to reconnect with better consumption habits.
17. Who has the right to consult your credit report?
In practice, almost anyone can view your credit report. This is of course provided that you give them permission. It’s not just lenders who care about your score, but many landlords and employers are also curious about the bottom line of your financial life. You can question the relevance for an employer to scrutinize your payment habits, but it remains a common practice.
So should you be worried if a potential employer requests a credit file check as part of the hiring process?
I highly doubt that anyone has lost job opportunity due to a 2-month delay from 2016 or has a debt ratio that is a tad too high. Employers generally use the credit report as a final “disaster check”. In other words, their main objective is to confirm that your financial management is not so problematic as to cast doubt on the qualities you have demonstrated in an interview. If you are really worried that the state of your credit report may affect your chances, it is best to let the employer know in order to put things into context. But don’t be fooled! No employer will openly admit that your bad credit meant that you weren’t selected for the job.
18.Does your credit report follow you to the United States?
With a few differences, the US and Canadian credit rating agencies operate the same. They have essentially the same organizations, Equifax and TransUnion, as well as a company called Experian collecting the information. The credit score system is only very minimally different. Despite this, which is bad news for good payers, your credit history doesn’t cross the border.
Credit Score Scale:
- Canada: 300 to 900
- United States: 300 to 850
Yes, if you’ve spent the last few years with our neighbours to the south, you’ll need to rebuild your credit from zero.
In conclusion the credit report is highly imperfect. Beyond errors that may find their way into it, it is a tool that omits too many factors to establish a person’s reliability with full confidence. After all, many people who are financially successful today have gone bankrupt. Conversely, just because someone pays their bills diligently doesn’t make them a good tenant. Despite its flaws, your credit record will follow you for the rest of your life. So, it’s better to pay attention to it!
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