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Many people are under the impression if they pay their bills on time they must have good credit. However, this may or many not be true. Because while your payment history is one consideration for your overall credit health, there are several other factors which influence how eager lenders will be to do business with you. To better understand how this complex process works, it might be helpful to explain exactly what is meant when we talk about having good or bad credit.
Credit Report Your credit report is a summary of your financial history. It includes personal information such as your name, address, date of birth, gender, employer and social insurance number. It also itemizes all your past and current credit accounts – including every loan, line of credit, mortgage, credit card, student loan and any other debts you have ever applied for. Your credit report considers how timely your payments have been, if and how frequently you tend to miss payments, whether any of your debts have ever gone into collections or if you have ever applied for a bankruptcy or consumer proposal. Finally, it provides information about how long you have been using credit, your loan amounts and credit limits, how much credit you tend to use at any given time, how much of a balance you carry and how frequently you apply for new credit.
Lenders will review your credit report every time you apply for a new loan, line of credit, mortgage, refinancing, overdraft or credit card. They will also review this information periodically throughout their relationship with you to determine whether you qualify for credit limit increases or pre-approved offers. Any of the factors mentioned above can tip the scales toward your having good, fair or poor credit.
Credit Score Loosely related to your credit report is your credit score. When most people talk about having“good” credit, this is usually the measurement they are referring to. Unlike a credit report, however, your credit score does not provide an itemized breakdown of your credit history – only an abstract number which financial institutions use to gauge how much of a risk they would be taking to lend money to you. It is based on many of the variables considered in your credit report, but it is difficult to discern the weight given to each.
If you do not have any credit history – have never had a loan, credit card or line of credit to base their calculations on, for example – you would have a credit score of zero and would likely struggle to qualify for anything more than a low-limit credit card. Otherwise, your credit score will be a number between 300 and 900. The higher your score, the safer you appear as a borrower. Generally anything above 650 is required to be approved for most loans, credit cards and lines of credit.
Importantly, financial institutions cannot check your credit score without your permission.
Do I Have Good Credit?
Now that you know what banks and lenders are looking at, it’s time for you to do the homework to figure out how good your credit truly is. In Canada, credit reports are compiled by two major entities – TransUnion and Equifax. It is good practice to check this at least annually. Free snapshot reports are available online, but for a fee you can request a detailed report which lists all the activity listed above and provides a comprehensive overview of your borrowing career. Not only is it beneficial to know how well you are doing in relation to what lenders want to see, it is also a good measure against the threat of identity theft.
Though your credit score is not included with your credit report, you can also request this information from TransUnion and Equifax if you’re curious. Alternatively, major financial institutions are increasingly offering real time credit scores as part of their online banking services. However, as this tells you relatively little about your overall credit health, you do not need to check this as frequently as your credit report.
Note: Contrary to popular belief reviewing your credit report or your credit score will not lower your credit, so don’t be afraid to stay on top of it.
If you’re worried your ongoing battle with debt is causing significant harm to your credit health, a Licensed Insolvency Trustee can help. Call MNP for a free confidential consultation, we may be able to provide the advice and Life-Changing Debt Solution you need.
Based out of St. Catharines,
Doug Stuive is a Licensed Insolvency Trustee and Senior Vice-President at MNP LTD. To learn more about how MNP Debt can help, contact our local office at 1.800.324.6169 or toll-free at 310.DEBT (310.3328).
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