What is a Credit Report?
Your credit report is a summary of your financial history, showing how well and consistently you manage your financial obligations. This report is created when your first apply for credit or borrow money (i.e. student loans).
Once established, creditors (aka the companies from whom you’ve borrowed or been issued a credit card, including banks, credit unions, finance unions and retailers) will send the credit bureau detailed and factual information regarding their financial relationship with you. These details will include information related to when you first opened your account, if you make your payments on time, if you’ve missed payments, if you’ve maxed out or gone above your credit limit, etc.
Once received from the creditors, credit bureaus retain the information in a report to help other lenders make a more informed decision when it comes to granting you further credit. In short, your credit report is a detailed history of information received from current and previous lenders and paints a clear picture to new lenders of your current financial health.
It is for this reason that, when applying for new credit, lenders perform what is known as a hard credit check – in which case they request a copy of your credit report for review before making their decision. From this report, they can determine whether or not you’re a risky candidate for a loan and if you’re likely to repay them responsibly, and on time.
On top of regularly monitoring your credit activity, the credit bureau will also assign you a number or “score” based on how you manage your finances. Ranging from 300 to 900, scores ranked and 700 and above are considered good. To qualify for new credit, your score should be a minimum of 620, and no lower than 600 (in which case you’ll want to improve your score, first).
To sum up, the higher your score, the healthier your credit – and the lower risk you are to lenders. Keep in mind, however, while your credit score is a primary deciding factor for many lenders, they do take other considerations into account before making their decision.
How Is My Credit Score Calculated?
Canada is headed by two major credit bureaus, Equifax and TransUnion. While they behave a little differently, they both use similar algorithms to determine a borrower’s individual score. Below you’ll find a detailed breakdown of what factors, and their percentages, are used to calculate your overall credit score:
Your Payment History (35%)
Your payment history makes up the bulk of your credit score and is greatly influenced by whether or not you pay your bills on time – and will be lower if you make late payments, or worse, miss them altogether. Poor payment history as a result of missed or late payments, debts that have gone to collections and declarations of bankruptcy will all equate to a lower score. Once paid, any related delinquencies on your report will be less heavily weighed in time.
Current Debt (30%)
Just because you’ve been pre-approved for a $5,000 credit limit increase, doesn’t mean you should accept it! Next to Payment History, your current debt load greatly influences your credit score. And, the more credit you use in relation to what you have available, the lower your credit score will be. In fact, Canada’s credit bureaus recommend keeping your credit below 50% of the total limit, and ideally at 30%.
Length of Credit History (15%)
The longer your credit history, the longer you’ll have to prove yourself as a trustworthy and responsible borrower, ultimately resulting in a higher credit score. Even if you’ve missed a few payments along the way, a lengthy credit history will contribute to a healthier score overall.
New Credit (10%)
Every new credit application results in a hard check, by the lender, on your credit report. And, if you have a lot of lenders viewing your report within a short period of time, this is a red flag for the credit bureaus, leading to a lower score as a result. Why? Regardless of your reasoning, the credit bureaus are likely to see these frequent applications as an indicator that you may be in financial distress and looking for a way out by approaching a variety of lenders.
Type(s) of Credit (10%)
Lastly, your credit score is determined based on the “kinds” of loans and credit you hold. For instance, a healthy blend of credit, including credit card(s), installment loans (i.e. car payments and student loans), mortgages, retail loans and consumer finance accounts, will all serve to boost your score (in contrast to mountains of credit card loans).