When you apply for a mortgage, a credit card, a car loan or a line of credit, a little-known three-digit number assigned to you will influence the success of your application and the interest rate you will pay. This number, your credit score, is a statistical indicator at a given point in time of the likelihood that you will repay your debts. It is available from credit-reporting agencies, which are in the business of selling information to lenders on the creditworthiness of consumers and businesses.
A credit-reporting agency, or credit bureau as it is sometimes called, calculates a consumer's credit score using information from its extensive databanks on the credit history of millions of Canadians. If you have applied for any type of credit in Canada, you are likely in one of these databanks. Permission to disclose your financial dealings to "other parties" such as credit bureaus is a standard clause in many applications for credit.
Consumers may be surprised at the breadth of information that credit-reporting agencies have on file about them. Personal details including social insurance number, current and previous addresses, employment history and bank accounts are there. Many credit providers regularly report customer credit and payment activities to credit-reporting agencies. Hence, existing loans, available credit from credit cards and lines of credit, loan and credit-card payment history and any NSF cheques will likely be on file.
Public records such as debts referred to a collection agency and past bankruptcies will be listed, as will inquiries about an individual's credit. A consumer's file may be flagged with a fraud alert if she has been a victim of such credit fraud as stolen credit cards or identity theft.
A business that has a client's permission will contact a credit-reporting agency to obtain information about her creditworthiness. Depending on the nature of the request, the agency will provide the business with a credit report based on the information on file about the client.
Many creditors also want their clients' latest credit scores. Various credit-scoring models exist, depending on the specific needs of a particular business. The credit score favoured by many Canadian lenders is the FICO risk score, named after the U.S. company that created it.
The FICO scoring methodology incorporates information in five areas:
- Debt payment history
- How much money a consumer owes
- Length of credit history
- Types of credit used
- Number of recent inquiries regarding applications for credit.
A FICO credit score can range anywhere from 300 to 900. From a lender's point of view, the higher a customer's FICO score, the better. Acceptable scores depend on the lender and the nature of the credit sought. Generally, a credit score above 750 will qualify a mortgage applicant for most prime loans, and those with credit scores below 650 will have difficulty obtaining new credit.
Understanding Your Credit Report and Credit Score, a publication of the Financial Consumer Agency of Canada, explains in detail the credit-scoring methodology used by the two main Canadian credit-rating agencies, TransUnion Canada and Equifax Canada.
The information sold by credit-reporting agencies is potentially life-altering. Given this reality, a smart consumer will obtain her credit file and score from the two aforementioned agencies well in advance of shopping for credit, looking for a new place to live, seeking a new job, or even applying for insurance. She can then correct any errors in her credit file, a process that could take up to several months, and, if needed, take steps to improve her credit score.
According to an Equifax Canada spokesperson, making at least the minimum payment on all financial obligations every month is by far the most important way for a consumer to boost his credit score. Paying down outstanding balances and limiting new credit applications and the number of inquiries regarding credit history can also help. A consumer should not cancel his oldest credit card, since this action could shorten his credit history and negatively affect his score.
A credit-reporting agency is required by law to disclose, without charge, the information it has on file about a consumer. Both the TransUnion Canada and Equifax Canada websites provide instructions on how to request your free personal credit file. Your file is available from both firms by telephone, mail or in-person, and by fax from Equifax. For a fee, you can get immediate online access.
A credit score is not part of a consumer's credit file. At the moneyville.ca website, you can estimate your credit score using the free Credit Score Rating Tool, but you will need to pay to obtain your actual credit score from a reporting agency. The cost is $11.95 when ordered with Equifax Canada's free credit profile. A package that includes your credit report, credit score and explanatory information can be ordered online for $23.95 from Equifax and $22.90 from TransUnion.
With a few minutes of effort, you can minimize the inconvenience and embarrassment of a rejected application for credit. When considering a financial transaction that will likely require a review of your credit, begin by checking your credit file and score at the two main Canadian credit-reporting agencies.
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