When you borrow money, use your credit card or pay bills, information about your financial transactions is sent to a credit reporting agency. The agency records this information in your credit report and uses it to generate your credit score. Your credit score is based on how much money you borrow, how much you are able to borrow, and how reliable you are at paying it back.
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What will your credit report tell you?
Your credit report is a document that summarizes your credit history — essentially, your record of borrowing and repaying money. Your credit report also contains identifying information and public records.
The financial information contained in your credit report includes but is not limited to:
- Credit you use, including credit cards, retail store cards, lines of credit, and loans.
- Factual information about your credit use, such as when you opened your account, how much you owe, your payment history, whether you have exceeded your credit limit, and other information.
- Debts sent to collection agencies.
- Inquiries from lenders and others who have requested your credit report in the past three years.
- Remarks including consumer statements, fraud alerts, and identity verification alerts.
- Bankruptcies or court decisions against you relating to credit.
The personal information contained in your credit report includes details such as your:
- name and date of birth
- current and previous addresses and telephone numbers
- social insurance number
- driver’s license number
- passport number
- current and previous employers
Information can stay on your credit report for up to seven years, depending on the type of information. If you have a credit account that is active, it will stay on your report as long as the account is open, and for several years after the account is closed. Negative records such as missed payments, collections, or bankruptcies, can also stay on your account for up to seven years or more.
How can you check your credit report?
You actually have more than one credit report. That’s because there are two major credit reporting agencies in Canada: Equifax and TransUnion. You can order a copy of your credit report from one or both of these agencies each year, for free. It’s a good idea to check both, since they may be slightly different. Both agencies offer free credit reports online or by mail.
Because you can check your credit report for free once a year at either TransUnion or Equifax, consider checking them six months apart. That way you will essentially be checking your credit report twice during the year, but only once at each credit reporting agency.
Who else can see your credit report?
There are rules about who can see your credit report. In general, this must be done with your consent. This includes:
- banks, credit unions, and other financial institutions
- credit card companies
- car leasing companies
- insurance companies
When a lender or other institution checks your credit report this is considered an inquiry. If there are many inquiries on your credit report in a short period of time, this can negatively affect your report. This is because it may seem as though you are urgently seeking more credit.
What is a credit score?
Your credit score is part of the information contained in your credit report. It is a number between 300 and 900. The higher your score, the better you appear to lenders. If you have managed your credit well and from a variety of sources, you would be more likely to have a higher score.
Your credit score will change over time, as your credit history evolves, and the number can go up or down. Typically, a high credit score means you are considered credit-worthy, and a lower credit score means you are considered more risky to lend to.
The same credit reporting agencies that track your credit report — Equifax and TransUnion — also calculate your credit score. Several factors can affect your credit score including:
- How long you’ve had credit, and what types.
- How much you owe.
- Being near, at, or above your credit limit.
- Whether you regularly miss payments or carry a balance on your credit cards.
- Whether your debts have been sent to a collection agency.
- Whether you have a record of insolvency or bankruptcy.
Keep in mind your credit score also only considers your financial history within Canada. If you’re new to Canada, you will need to establish a credit history in order to get a credit score. This can take time but can be done gradually through steps like getting a cell phone with a monthly plan and paying it regularly each month or taking on a credit card and repaying it promptly. It’s important to build your credit history gradually, since applying for too many credit cards or loans at once can potentially harm your credit score.
Why is it a good idea to check your credit report?
Your credit score reflects your financial health. It helps lenders understand how financially responsible you are with debt. A good credit score may make it easier to qualify for loans and credit products, such as mortgages and credit cards, and can help you get better interest rates and terms. It’s a good idea to stay up to date on your credit report and credit score, so that you won’t have any surprises.
When you check your credit report, you’re reviewing it to make sure it is accurate. Look for any mistakes such as:
- Incorrect personal information such as address or date of birth.
- Incorrect information about your financial accounts – for example, if an account that you closed is listed as open.
- Accounts listed in your name that you never opened – this could be a sign of identity theft or fraud.
- Negative information about your accounts that is in your credit report beyond the maximum time it is allowed to stay on your report.
If you find errors in your credit report, report them as soon as possible, since it can take months to complete the correction.
There are 5 steps you can take if you’re concerned about your credit report:
- Gather information to support your case, such as receipts, account statements, or any other documents that can help you prove your claim.
- Report all errors to the credit reporting agency: both Equifax and TransUnion have credit report dispute processes.
- If you believe your credit report shows evidence of fraud or identity theft, you should also report this to the Canadian Anti-Fraud Centre.
- Contact the lender. Ask them to verify their files and update the credit bureaus with the correct information.
- Take these further steps if you’re not satisfied with the results of your credit dispute.
How can you improve your credit score?
Since your credit history and credit score are important parts of your financial identity, it’s a good idea to work on improving them. Just as your credit score is calculated from many aspects of your financial history, there are also multiple ways you can work to improve your credit score, including:
- Pay your bills on time – Late or missed payments can lower your score. In addition to payments on your mortgage, credit cards and other loans, your payment history will also include certain accounts like phone bills and utility bills.
- Keep up with your payments – If you’re not able to pay your entire credit card bill each month, at least make the minimum payment. While paying more than the minimum is ideal, paying the minimum amount is better than missing a payment altogether.
- Have a mix of credit types – Your credit score is likely to improve if you have a history managing multiple types of credit successfully. For example, keeping a credit card, mortgage, and line of credit.
- Don’t over-use your credit – While a mix of credit types can be a good thing, it’s not a good sign if you’re over-using them. If you’re maxing out your credit limit, this can negatively affect your credit score. But it’s also recommended not to use more than 50% of your credit available, at the most. This is referred to as your credit utilization ratio. In other words, how much credit you use compared to how much you have available.
- Avoid unnecessary credit applications – Don’t apply for new credit cards or loans if you don’t need them. Your credit score can decrease slightly each time you apply for credit, such a new credit card or auto loan. This is also called a “hard inquiry”. The decrease is usually temporary, but some lenders may consider having many credit applications within a short period of time as a warning sign.
- Develop a long credit history – The length of time that you’ve had credit products open can affect your credit score. Generally, a longer credit history can improve your credit score, provided it shows you’ve been able to manage your credit well.
Credit can be a useful financial tool, but it must be used responsibly. Your credit report and credit score are important parts of your financial identity, that show how responsibly you’ve been able to use credit in the past. Remember:
- Your credit report contains a history of your financial information and personal information.
- You can request your credit report for free, once a year, from each of the two credit reporting agencies in Canada – Equifax and TransUnion.
- It’s a good idea to check your credit report regularly, to check for errors and report them.
- Your credit score is a number that represents your credit worthiness to other lenders.
- You can improve your credit score by managing your credit responsibly. This includes steps such as paying bills on time, avoiding unnecessary credit applications, and not over-using your credit.