Last month we wrote about the impacts of a poor credit score and how to improve it, but how do you even know where to begin? In this blog post I will address how to read and understand your credit report, so you can then address areas of improvement.
What Credit Reports Should You Be Using In Canada?
As I discussed in my last post, there are many new “free credit check” apps and programs, but they won’t necessarily be what your bank sees. In Canada we have two main credit reports: Equifax, and Transunion. There can be discrepancies between the two reports however, as not all creditors report to both.
A credit report is the primary tool that lenders use to decide if they will lend you money. Your credit report includes personal identification information as well as financial information like: a record of payment history on all credit facilities and cell phones, and if there have been any collections or past bankruptcies. It also shows any outstanding balances and maximum credit limits, as well as how many times you have applied for new credit.
Before you use one of the many widely available, but not necessarily useful “credit check apps” you can order yours from TransUnion or Equifax, and it’s free.
So What Does Each Element Of My Credit Score Mean?
Your credit score breakdown includes five different areas: Credit Utilization, Payment History, Length Of Credit History, Inquiries, and Types Of Credit. Different institutions give each element a different percent of your overall score, but I’ve included approximations below.
- Credit Utilization (Aprox 30% of your score):
This is the measure of how much of your available credit – on credit cards and/or lines of credit – is being used. It also factors in the number of accounts with balances and the amount paid down on instalment loans. Generally, lower credit utilization demonstrates restraint and is viewed as positive.
- Payment History (35%):
It doesn’t matter whether you pay off your balances every month, what counts is that you don’t miss minimums. This score looks at any late payments, along with any past foreclosures, bankruptcies or credit bureau accounts. It’s important to know that if you were a co-signer on a card, or debt that didn’t get paid that will show up as well.
- Length of Credit History (15%):
Creditors want to see a history of your borrowing actions to make a decision about what kind of borrower you are. Lenders typically want to see at least two open trades on a credit report, each being used for a minimum of two years.
- Credit Inquiries (10%):
Have you been applying for a lot of increases to credit limits, or trying to get a loan for a vehicle and had to go to numerous banks? Every time someone pulls your credit report it shows up on…your credit report. This can negatively impact your score if it looks like you are getting deeper and deeper into debt. An exception to this is borrowers who are rate shopping for a mortgage or auto-loan over a short period of time.
- Types Of Credit ( 10%):
In general, lenders like it when you manage a variety of credit types. Your credit score can improve if you have demonstrated the ability (and discipline) to manage several different credit accounts rather than having only instalment loans or only revolving credit.
How long does information stay on your Equifax or TransUnion account?
So you had a bad patch a few years ago, but you’ve been really handling your finances since, just how long can financial black marks stay on your record?
- Any Legal Judgments: Equifax will report a judgment for 6 years. TransUnion will also report for 6 years, except in ON, QC, NB and NL where they will report for 7 years, and 10 years in PEI.
- Consumer Proposals: Consumer proposals are a legally binding agreement to pay creditors a portion of what is owed, or extend the time, or both. Equifax removes a consumer proposal 3 years after all included debts have been paid. TransUnion removes it from the credit report either: – 3 years after all included debts have been paid; or – 6 years after the proposal is signed.
- Bankruptcy: Equifax will report for 6 years after discharge. TransUnion will report a bankruptcy for 6 years after discharge. Except in ON, QC, NB, NL, and PEI where it will remain for 7 years.
- Double Bankruptcy: Will stay on a credit report for 14 years.
If you feel there are some errors on your report that are impacting you negatively, you have recourse. Did you know you can apply to have credit report errors fixed?
Final Words on Your Credit Score
No one’s credit score is ruined forever. Even double bankruptcies can go away after 14 years, and you can start again.
Sometimes we have to take drastic action to help our finances during a rough period. Before you make any drastic moves, it is very important to understand all options and alternatives available as your choice could limit your ability to purchase a home in the future.
There are several alternatives to Bankruptcy, including Credit Counselling and a Consumer Proposal. If you are in this position, I strongly suggest seeking the advice of a lawyer and/ or accountant in addition to your mortgage professional.