The Canadian credit bureaus are similar to the Knights Templar. We know they exist, but nobody has ever seen them and we don’t really understand what they do.
A credit company maintains information about consumer credit reports. These reports are sold to businesses, such as insurance firms, banks, and retailers, so they can access the credit worthiness and payment history of the customer. This history provides an indication of how the customer has honoured financial obligations in the past. Businesses then use this information to decide what sort of products or services to offer the customer, and on what terms.
Your magic number
Your credit score is a number between 300 and 900. It’s better to be higher! If you have a high credit score, that means you’re a good risk for credit.
So when you apply for a new credit card or a car loan, you’re more likely to be approved. You may also get a better interest rate — lenders might want your business and will be competitive to get it.
Some agencies use a different number called your credit rating — which goes from number one through nine. This works the opposite way: having a low rating means you pay your bills on time and having a higher number means you don’t pay your bills.
This rating is divided up for three different kinds of loans: I, O and R. I is for installment (a loan you pay off at regular times), O is for open credit (a line of credit is an example) and R is for revolving credit (credit card debt).
How is a credit score calculated?
Trying to understand your credit score and how it’s calculated is like trying to crack a complicated algorithm. But we’ll give it a shot anyway.
A credit score is a statistical formula that translates personal information from your credit report and other sources into a three-digit number. Most Canadian credit bureaus use the method first introduced by a company called Fair, Isaac and Co, and known as the FICO score. It is a number between 300 and 900 that lenders use to determine your credit risk. The higher your credit score the more likely you are to be approved for loans and receive the best rates.
Your FICO score
Your FICO score measures the following categories (in order of importance):
1. Payment History – any and all instances of unpaid loans, your payment history, how many past due items are on your file
2. Amounts Owed – your total outstanding debt and type of debt, number of accounts with balances, proportion of balances to total credit limits
3. Length of Credit History - time since accounts opened and time since account activity
4. New Credit - number of recent credit inquiries and openings, time since credit inquiries made
5. Types of Credit Used – presence and prevalence of various types of accounts (credit cards, retail accounts, line of credit, mortgage, car loan, etc.)
Take action with your credit score
If you believe there’s been an error on your credit report, you can contact the reporting bureaus and request a correction.
If your report is accurate but you’re not happy with what you see, you can fix that too! Just start paying your bills regularly, pay down your credit card and be sure you’re on time with all your loan payments. Keep your debt load low — so pay down your loans — and keep at it. Over time, your credit numbers will get better.