Some financial advisors will tell you that past performance is not an indicator of future outcomes. This is most often a cautionary note to potential investors to warn them of risks and uncertainties in financial markets. But others in the financial field, especially those that lend money for a living, look to past behaviour quite closely when making decisions on loans and assigning lines of credit.
A simple behaviour such as paying your bills on time figures prominently in your credit history file, as do factors such as amounts owed, length of credit history, new credit card applications and the types of credit and loans you have available.
Two credit reporting agencies are tasked with keeping track of your credit file or history, Equifax Canada and TransUnion Canada. Your creditors or bill collectors will send payment information on a regular basis to one or both of these agencies and they compile a credit report, which is basically a snapshot of your credit history used by lenders in deciding if and how much of a loan or credit to assign. Incidentally, both of these agencies will provide you with a free copy of your report annually if you make a proper request. It's important to monitor the accuracy of your credit history and to ensure any mistakes are fixed promptly before they have any negative impact.
In addition to personal information such as your current and previous addresses and employers, the credit report lists pertinent information such as savings and chequing accounts, credit cards, lines of credit, loans, unpaid debts referred to collection, bankruptcy filings as well as a list of inquiries made about your credit.
One of the primary tools generated from the credit report is your credit score, also called a Beacon or a FICO score. This is more or less a financial judgement made at a specific point in time and gives potential lenders an indication of the risk you pose as far as paying back a loan or obtaining a line of credit.
Equifax and TransUnion employ a scale from 300 to 900, where a higher score represents a lower risk to the lender. Lenders, of course, use the credit score as a major benchmark and often combine this information with other factors contained in your credit file. Various lenders will also determine the lowest score a customer may have for consideration of a loan.
Interestingly, nearly 27 percent of Canadians have a credit score between 750 to 799, and only two percent in this group are expected to default on a loan or go bankrupt in the next two years, according to statistics from the credit agencies. It would be quite surprising for those who belong in this category to be denied a reasonable car loan or home mortgage.
If your credit score is below 650, TransUnion reports that you may have trouble receiving new credit. Also, some banks or financial institutions often require a minimum score of 680 before agreeing to offer the best interest rate.
Typical factors that can affect your credit score include the items listed in your credit report plus specific details outlining your history of making/missing payments, credit card balances and different types of credit in use.
Similarly, some credit-reporting agencies report a lender's rating of each of your credit history items on a scale of 1 to 9. For example, a credit rating of 1 indicates you pay your bills within 30 days of the due date, whereas a 9 rating could infer that you never pay your bills at all or you have made alternative payment arrangements with a lender. It might also mean the bill was placed for collection or the customer has moved without providing a forwarding address or has filed for bankruptcy. A letter may appear in front of the 1 to 9 in the form of I, O or R, indicating the type of credit you are using and representing Installment, Open Credit or Revolving Credit respectively.
Now that you have an understanding of how your creditworthiness is determined, you know the value of making your credit card payments on a timely basis as well as ensuring your bills are paid on time. If you know you can't pay the full amount on your credit card, it helps if you exceed the minimum payment. Also, if you expect any difficulty paying a bill or making a loan payment, it's beneficial to contact the retailer, service provider or lender before it's due to make alternative plans to repay your debt on a more manageable schedule.
