We all have a credit report, but how well do we understand its content and importance? Although we know it impacts our borrowing capacity and mortgage options, many people are not clear on what their credit report actually contains.
How do credit scores, credit rating and credit report work? Let’s dive in!
1. Your credit report reflects your financial habits
If you are looking at your credit report and wondering why your score isn’t as high as expected, consider evaluating your financial habits, which can directly affect your credit score. Ask yourself the following questions:
- Do you repay your loans on time?
- Do you clear your credit card balance each month?
- Do you pay your bills promptly?
- Do you only borrow what you need?
- Do you ever exceed your credit limit?
- Have any of your accounts been closed due to fraud or unpaid debt?
If your responses indicate poor financial management, this might explain a lower credit score. To improve your situation, focus on these actions:
- Ensure timely repayment of all loans.
- Pay your credit cards on time.
- Avoid writing non-sufficient funds cheques.
- Refrain from requesting multiple credit limit increases within a year.
- Pay your taxes punctually.
- Avoid accumulating unpaid debts.
2. Your credit score is based on your financial behaviour
Understanding your credit report is essential but knowing what your credit score represents is equally important. In Canada, your credit score ranges from 300 to 900, with 900 being the highest. But how is this score calculated?
Essentially, your score is generated through a mathematical formula based on the data in your credit file, processed by computer systems.
Each time you use your credit, you either gain or lose points. Responsible credit behaviour can boost your score, while missed payments or other irresponsible actions can lower it.
Your credit score reflects:
- Any bankruptcies or court judgments against you.
- Transaction details across all your accounts, including credit cards and store accounts.
- Information about your loans and lines of credit.
- Outstanding accounts.
- Any debts sent to collection agencies.
- Requests for your credit information from lenders or other entities.
- Your mortgage and payment history.
- Closures of accounts due to non-payment, fraud, or other serious issues.
3. Your score may vary between lenders
This can be quite confusing! If you check your credit score with different lenders, you might find that each one provides a different score. Why does this happen? It’s because there are various types of credit scores, each tailored to the specific needs of different lenders.
Different types of loan might emphasize different factors. As a result, your score can vary depending on the lender’s criteria. However, it’s important to note that while scores may differ slightly, they should generally align with your overall credit profile.
4. Your credit score directly affects your life
Understanding your credit report also means recognizing its significant impact on your everyday life. While it’s well known that a poor credit score can hinder your ability to secure a loan, the effects extend beyond just loan approval.
For instance, a low credit score might result in higher interest rates if a lender does approve your loan. Additionally, it can influence the credit limit a lender is willing to offer you, which can limit your borrowing capacity and financial flexibility.
5. Who has access to your credit report?
Understanding who can access your credit report is essential. Typically, employers, landlords, and lenders are the primary parties interested in reviewing your credit report. Insurers might also request this information to determine eligibility or set premiums for insurance policies, such as for mortgages or cars, though this is not always allowed.
Access to your credit report is not automatic. In some cases, entities must obtain your consent, while in others, a simple notification may be sufficient.
Additionally, you might be asked to authorize the sharing of your credit information with assessment agencies. In rare cases, law enforcement, judges, or other government officials may access your credit report without your consent.
6. Your credit report is updated
Your credit report included your payment history, but it isn’t a permanent record of all your transactions. Typically, the information on your credit report is retained for about 6 to 7 years. The duration can vary by province, and in some cases, positive information may be retained for a longer period.
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