Canadians should be aware of credit reports, credit ratings and credit scores. Although they are similar, each is a separate and individual thing. It's important to be in the know because these things can play a large role in your financial life.
Credit Reports
A credit report is a document that serves as a record of your borrowing history. The file will detail what types of credit accounts you have and your history of payments on each. This includes everything from credit cards and loans to mortgages and more.
Your credit reports are put together by the two major credit bureaus in Canada: Equifax and TransUnion. These agencies collect information from the companies and lenders you borrow from and compile it into the reports.
Lenders will use your credit reports when making decisions. They are tools that help them decide whether or not to offer you credit, and on what terms they are willing to do so.
Therefore, it's important to know what's on your reports. If you regularly check them, you can identify areas where you can improve, find errors you can dispute, and spot signs of fraudulent activity that you can put a stop to.
You can get copies of your credit reports for free. Every 12 months, you are entitled to a complimentary copy from each credit bureau. All you need to do is call or mail in a form to one of the agencies. You can also access them instantly online for a small fee. Head to either Equifax's or TransUnion's website for more information.
Credit Ratings
On your credit reports, you will see that each account could be accompanied by a credit rating. Sometimes, the credit bureaus report a rating of every item individually. Credit ratings are composed of a letter-number combination (ex. R1).
The letter signifies the type of credit account being evaluated. The most common forms are "I," "O," and "R."
- I: Installment credit, like a loan. These are accounts repaid with regular installments over a specific period of time.
- O: Open credit, such as a student loan. This is a type of loan where you can borrow up to a certain limit and you have to pay back the balance after a certain amount of time.
- R: Revolving credit, like a credit card. These are accounts where payments depend on your account balance.
Other letters that may appear include "L," for a lease, "M," for mortgages, or "C," for a line of credit.
The number following these letters represents your payment history on the account. They can range from 1 to 9, where lower numbers indicate a strong repayment history. It can also be a zero, when there is too little credit history or the account is unused.
A rating of "1" shows that all payments were made on time, every time. The higher the number, the less responsible you've been at paying on the account. So, the highest rating of "9" means that account is in default, sent to collections, or was part of a consumer proposal.
Credit Scores
Finally, a credit score is a three-digit number that represents your overall creditworthiness. It is calculated based on the information found in your reports. A good analogy is to think of your credit report as the school paper, and your credit score is the grade you got on it.
There are several different credit scoring models. Each will be slightly different, but they are based on factors concerning your credit usage and history. They cover factors like your overall payment history, credit card utilization, types of accounts in use, and the length of your credit history.
Equifax and TransUnion use a scoring model that ranges from 300 to 900. Higher scores are better and indicate that you represent a low risk to future lenders. Typically, good scores are classified as those 600 and up, while scores are considered excellent if they top 750.
Lenders will look at your credit score when deciding if you are worthy of an approval. They will also use them to set the interest rate you will pay, if approved.
Your credit scores will not be included on any free credit reports you request by mail. However, you can get your official score straight from the credit bureaus for a small fee when you choose to access your report electronically.
Getting Approved
A low credit score and/or negative information on your credit reports can make it tough to get approved for credit. But if you are in this situation and need a car loan, Canada Auto Loan can help.
We help people with poor credit seeking auto financing get connected to a dealership that can help. Our service is free and puts you under no obligation, and we'll work fast to help you get approved. Get started today by completing our secure online application.