Understanding Credit Reports

Whether you’re trying to establish credit for the first time or trying to re-establish credit after experiencing financial difficulties, the first step is understanding your credit report.

What is a credit report?

Your credit report is a summary of your credit history. It is created when you borrow money or apply for credit for the first time. Lenders send information about your accounts to the credit bureaus creating a history of repayment that other creditors use to gauge your creditworthiness.

What is a credit rating?

Your credit rating is an alphabetical and numerical code which provides a history of how you have paid each individual creditor. These codes have two parts:

  • A letter which shows the type of credit you’re using. For example, I = installment credit meaning you borrowed money for a specified period of time making regular fixed payments (car loan) or R = revolving credit meaning you borrow money up to a certain credit limit and make regular payments of varying amount depending upon how much you have borrowed (credit card).

  • a number which shows when you make payments. Numbers run from 0 to 9 and each number has a specific meaning. The best rating is 1. Any number higher than a 1 will hurt your credit score because you have not made payments as agreed with that creditor.

For example, if you have a credit card that you paid on time, it will be reported as an “R1”.

What is a credit score?

Your credit score is a three-digit number which helps lenders determine if you are a good financial risk. Your credit score is calculated using a formula that produces a number between 300 and 900. This higher your score the better credit risk you are to the lender. There are several factors which may impact your credit score. These factors can include:

  • how long you’ve had credit

  • if you carry a balance on your credit cards

  • if you regularly miss payments

  • the number of your outstanding debts

  • being close to your credit limit

  • the number of times you try to get more credit

  • the types of credit you’re using

  • if your debts have been sent to a collection agency

  • any record of insolvency or bankruptcy

Each lender determines their own minimum score necessary for them to lend you money.

Who are the credit reporting agencies in Canada?

There are two main credit bureaus in Canada:

You should get a copy of your credit report at least annually to ensure that the report is accurate. Yes, mistakes can occur on your credit report which can lead to problems being approved for credit. You can order your credit report by contacting the credit bureaus using the websites noted above. Looking at your own credit report will not have a negative impact on your credit score.

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Brenda Wood is a Licensed Insolvency Trustee with Salyzyn & Associates Limited. She has over 20 years of experience in the financial industry.