Are you likely to pay your debts in a timely manner? Don’t bother answering—your credit score will answer for you. If you’ve ever applied for a credit card, borrowed money for a home or a car, or gone to the bank for another type of loan, you’ve been subjected to a credit check—the lender has asked for a copy of your credit report.
“A credit report is a point-in-time snapshot of your financial behaviour,” says Tom Reid, Director of Consumer Solutions for TransUnion Canada.
Credit bureaus such as TransUnion partner with lenders to assess how you handle your financial obligations and then provide that information to any company thinking of granting you credit or providing you with a service or product. Credit reporting is used for all sorts of decisions by financial institutions and other companies, including approving or declining customers based on their risk of defaulting on a loan.
Typically, explains Reid, five factors go into your credit report:
1. Payment History
A solid record of making payments on time – from your credit cards to your mortgage payments – will help to boost your credit score. Generally, this information stays on your report for 6 to 7 years.
2. Outstanding Debt
The key is what’s known as “utilization”. If you have a credit card with a $10,000 limit and a $1,000 balance, that’s a 10% utilization. “Aim to keep your utilization below 30%,” says Reid. “Going over 50% will have a negative impact on your score. The higher your utilization, the greater the risk you won’t pay as agreed.” So getting a credit limit increase can be important, even if you don’t plan to spend more; the higher limit can serve to reduce your utilization percentage.
3. Credit History
The longer you’ve had credit and maintained a solid payment record, the less risky you’re perceived by lenders. Be wary of closing old accounts, even if they’ve been inactive; it will eliminate some of your long and positive credit history.
4. Types of Credit
Ideally, you want a long and varied credit history. “Your risk will be lower if you’ve used a number of types of credit,” says Reid. “A single credit card will give you one score. But if you have three credit cards, a car lease, a private label credit card, a mortgage, etc., that variety has a positive impact. It shows your ability to handle different types of payment requirements.”
5. Number of Recent Inquiries
Any time someone requests a credit report on you, the inquiry is noted in your file. “Too many inquiries in a short time may signify a distressed borrower,” says Reid. “Lenders have different criteria, but the appearance is you’re more risky, that you’re seeking credit from multiple sources because you don’t have the credit history to get approval.” An exception? When you’re looking for a car loan or mortgage. “Then, it makes sense to shop around,” Reid says. “Multiple inquiries in a short period of time will count as one. You’re just being a smart consumer.”
Reid’s advice for maintaining a good credit report? Don’t miss or be late with payments, don’t use all your available credit, establish multiple sources of credit as early as possible, apply for credit in moderation, and monitor your credit profile at least once a year. These factors combined, not individually, will make—or break—your credit score.
Be aware, too, of other factors that can hurt your score, like a bankruptcy, a tax lien (imposed for delinquent taxes owed), or other unpaid obligations (e.g., a judgment that goes against you in small claims court). If you’ve been a co-signer or guarantor on a loan, a failure to pay the debt will show up on your credit report. So when going through a divorce, for example, it’s prudent to close or re-finance co-signed accounts.
You’re entitled to a copy of your own credit report, to see your status and check for any inaccuracies. For information, contact TransUnion Canada (1-800-663-9980), Equifax Canada (1-800-465-7166), or Northern Credit Bureaus (1-800-532-8784).
The Financial Consumer Agency of Canada also offers a publication online called Understanding Your Credit Report and Credit Score.
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