| YOUR CREDIT RATING
There are two credit agencies in Canada: Equifax and Trans-Union. These agencies are private companies that are Information Centers to whom your creditors transmit their data on you. With your consent, anyone that is a member of these agencies may consult the existing databases. It is not the credit agencies that assign you a rating, but rather your creditors. However, under the Law, the credit agencies have an obligation to present accurate information. If you should, however, discover an error, the agencies have an obligation to correct it.
CREDIT RATING SCORE
The score that is assigned to your credit file may vary between 300 and 900 points. The lender will rely on the score to decide whether to approve a loan. A high score signifies a long and positive credit history. It is possible, that since Equifax and Trans-Union use somewhat different criteria for the assignment of a score, your score between the two agencies may differ to some extent. Following, are 5 factors that may influence your score :
1. Credit Applications
Each time a lender checks your credit file to decide whether to approve a loan or provide you with a credit card, the enquiry is noted in your file and it influences your score. The belief is that if you are in search of credit, and therefore you are more at risk of increasing your overall indebtedness. Knowing this, you must pass up filling out numerous credit applications and must never fill out a credit card application for “a chance to win a free trip”. On the other hand, if you are shopping for a mortgage, several requests made in a very short period of time will be grouped and considered as a single application. In this particular case, your score will not be adversely affected.
2. Credit History
If your accounts have a long-established history, your creditors can more easily assess your debt repayment habits. In short, the longer the history, the better the score.
3. Average balances
The average outstanding account balance in each of your accounts can also influence your score. An average account balance of over 50% of the authorized credit limit will negatively affect your score. Thus, if your authorized credit limit is l0,000 $, it will be in your interest to maintain an outstanding balance of less than 5,000 $. The same reasoning applies to your credit cards.
4. The outstanding loan balances in relation to the total amounts borrowed
The score compares the current outstanding balance of your loans (personal loans, vehicles, etc.), to the initial amount borrowed, except for the mortgage on your personal residence. The closer you are fully repaying your loan, the higher the score.
5. Number of new accounts opened
The opening of several new accounts, credit cards, lines of credit, and personal loans negatively affect your score. Lenders believe that with all of these new accounts, you are more at risk of increasing your overall indebtedness. It is, therefore, in your interest to limit the opening of new accounts.
Nationwide distribution of scores
By way of illustration, we have prepared below a graphic distribution, by score, of people that have a credit file at Equifax Canada:
(source : www.equifax.ca)
R0 File is too new to be classified. Credit is authorized, but not used;
R1 Payments are always made as provided for in the contract; paid within 30 days of billing date or having no more than one late payment;
R2 Paid within 30 days to 60 days from the due date or having no more than two late payments;
R3 Paid within 60 days to 90 days from the due date or having not more than three late payments;
R4 Paid within 90 days to 120 days from the due date or having not more than four late payments;
R5 Payments are at least 120 days late, but not yet assigned a score of « 9 »;
R7 Debts paid at the end of a debt consolidation loan, or voluntary deposit at Court, or any other similar arrangement, such as a consumer proposal;
R8 Repossession of property, either voluntary or involuntary, or a return of property, vehicle, or merchandise.
R9 A bad debt, a debt been placed with a collection agency, having moved without providing a new address, and Bankruptcy.
The R preceding the number signifies that it is a revolving credit, such as a credit card or a personal loan. If the debt is a conditional sales contract, as in the case of a vehicle loan, the preceding letter will be an « I »;. In the case of an open line of credit, the preceding letter will be an « O ».
To obtain your credit file
By law and upon request, you have the right to obtain a copy of your credit file. You can obtain a copy by mail, free of charge, by completing the application form at www.equifax.ca. You can also obtain a copy through the Internet at cost of $15.50. If you wish to obtain your credit file and your score, the cost is $21.90 (www.econsumer.equifax.ca.).
PRACTICAL ADVICE TO IMPROVE YOUR CREDIT SCORE
- Before applying for a loan, arrange to obtain a copy of your credit report from the credit agency and review same to ensure that there are no errors. Should there be an error, you must make the correction immediately. A well prepared credit application with a reasonable amount requested, properly presented to the credit agent at your financial institution, will reduce the chances of a refusal and avoid a negative inscription in your credit file.
- Avoid repeated credit loan applications. Rejected loan applications negatively impact your credit score.
- Avoid paying your accounts late. Irrespective whether the unpaid amount is small or large, a delay is a delay. An R-9 credit rating is frowned upon by your creditors, whether for an account of $2,000 or $200.
- Try to maintain your credit card and line of credit balances as low as possible, ideally 25% or less of the authorized limit. It is at this percentage that your credit score increases the most. When the balance of your account is between 25% and 50% of the authorized limit, there is still an increase but not as significant. Should the balance be more than 50% of the authorized limit, there will a negative impact on your credit score.
- The accounts (credit card / line of credit / personal loan) that have been opened for the longest period of time better serve your credit score than newly opened accounts. If possible, keep them open, without having too many of them opened at the same time.
- Beware of any advertisement that guarantees a quick solution to better your credit rating and score. Fees can be very high and there are no magical solutions. As in a heeling process, time and patience are the best remedies to regain the confidence of your creditors.
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