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A recent CBC Canada survey revealed that only 7 per cent of Canadian adults have checked their credit reports in the last three years. Chances are, you already know how important your credit score can be to your financial future and to your opportunities in general. All financial institutions, many landlords, and even some employers dig into credit scores to screen their applicants. But despite this knowledge, the majority of Canadians go for years without bothering to check their reports, thereby foregoing the possibility of fixing any issues in their track record.
Here’s an overview of what you should know about credit checks, and why you should request a report on an annual basis even if you’re not planning on applying for a mortgage within the next 6 months.
What is a credit score and how does it work?
A credit score is a financial calculation that translates the data within a credit report into a three-digit number that lenders use to make credit decisions. Your score is based on four factors: your payment history (how many on-time payments you’ve made to creditors such as cellphone providers and credit card payments, your outstanding debt (debt balances over 50% will harm your credit) your credit account history (how many credit accounts you hold), and your recent inquiries to other lenders for credit.
Credit scores range from 300 to 900. The higher the number, the likelier you are of obtaining the loan or credit you’ve requested. To give some perspective, 27% of Canadians fall within the 750 to 799 score. Statistics have shown that only 2% of borrowers in this category will default on a loan or go bankrupt in the next two years. That’s an indicator to lenders that they can trust you with their money.
On the lower end, TransUnion marks 650 as the cutoff score, below which you’d have trouble receiving any new credit at all.
Why is your credit score so important?
Credit scores become critically important as soon as you’re applying for any type of loan. As previously mentioned, a low credit score could compromise your ability to secure the financing on a mortgage, a phone plan, a car lease, or an insurance plan. As a tenant, it could cost you the lease on a your dream rental.
But that’s not all. The higher your credit score, the better the interest rates you’ll secure on your loan. Some mortgage lenders won’t allow borrowers with a credit score of less than 680 to secure their lowest interest rates. Old, unpaid bills such as unpaid traffic violations can lower a clean credit score by as much as 100 points. Over the course of a 30 year mortgage, one such negligence can cost you up to $9,000 in interest rates.
This isn’t too much of an issue for people who regularly check their credit reports. The earlier you notice the presence of an old bill you simply forgot to pay on your report, the easier it’ll be to rectify the mistake and bring your score back into the green zone.
Credit has a long history. Credit information, whether good and bad, remains on file for at least six years. Given that it takes so long to build good credit, you should be extra diligent about spotting and correcting slip-ups as soon as they happen.
For those who have had credit issue in the past, requesting a credit report is especially daunting. But doing so will allow you to monitor your progress and to make sure you’re on the right track to full credit recovery. When you’ve fallen into debt once, it’s especially important to keep track of your financial standings on a regular basis.
And lastly, reviewing your credit report is an important yet vastly overlooked part of managing your personal finances. You should review your credit report annually the way you review your credit card bills and your taxes. It’s an essential part of building your financial discipline, and a prerequisite to your long term financial success.
You can obtain a copy of your credit file from Equifax Canada, or from Transunion Canada. It’s free if you opt to receive the service by mail, so you really have no excuse. All you need to do is find the details on the respective websites, and send in photocopies of your identification. Reports usually take between 2 and 3 weeks to process.
What should you look out for when looking over your report?
Each accounts in your report includes a notation with a letter and a number. The letter “R” refers to a revolving debt, while the letter “I” refers to an instalment account. For a revolving account, look of for an R1 rating, which means you’ve paid your bills within 30 days, or “as agreed.”
The scores go from 0 (too new to rate) to 9 (bad debt or placed for collection or bankruptcy.)
Needless to say, lenders are expecting to see lots of “Paid as agreed” notations in your file.
Moreover, you should be looking for mistakes on the behalf of the report bureau, which are not unknown to occur and which can put a dent in your credit history. Check for credit card accounts that aren’t yours, and payments mistakenly recorded as late. If you see any errors, report them to your creditors or to your bank as soon as possible.
If you see a name you don’t recognize or an unknown account, take into consideration that you may be victim to an identity theft or fraud. Call the toll free number on your credit card as soon as possible to verify that this isn’t the case.