CREDIT PROFILES AND CREDIT SCORES IN CANADA
Your credit profile, which is maintained by Canada’s credit reporting agencies, is a summary of the amount and types of credit you have, the length of time you have had these accounts, and your track record in paying bills. Most credit profiles include five categories of information:
- Identifying information (e.g. your name, spouse’s name, dates of birth, social insurance numbers, driver’s licence numbers, address, telephone numbers)
- Employment information (e.g. your current and previous employers, job titles)
- Credit information (e.g. accounts, balances, and credit limits), whether or not you have paid bills (phone, hydro, cable, credit card, etc.) on time, and whether you have had unpaid bills that were referred to a collection agency
- Public record information (e.g. bankruptcies, liens, or civil actions)
- Inquiries by creditors, lenders, insurers, or landlords
When you apply for new credit, such as a mortgage, car loan, or new credit card, the potential lender will review your profile to determine the likelihood that you will pay back the debt before deciding whether to give you credit and at what interest rate. Maintaining a positive credit profile means you are more likely to receive the credit you need, and at a lower cost than people with negative profiles.
BDO in Halifax can advise you about steps you can take to fix your bad credit profile and credit score.
Elements of your credit profile
Your credit score is an evaluation of your financial health – indicating the risk (your ability to pay) you represent to lenders. Credit reporting agencies rate credit on a scale from 300 to 900, which is often referred to as a FICO score (named for Fair Isaac and Company, the organization that developed this scoring system).
This rating is an indicator of a borrower’s creditworthiness based on a number of criteria such as payment history, outstanding credit balances, debt level, types of credit, number of inquiries etc. The higher your credit score, the lower the risk you pose to creditors and lenders. Lenders must decide on the lowest score you can have to still borrow money from them. They will also use your credit score to set the interest rate you will pay – the worse your credit score, the higher the interest rate.
Each time you receive credit, the lender will rate your payment record on a scale from 1 to 9. A rating of “1” means that you pay your bills within 30 days of the due date. A rating of “9” means that you do not pay your bills or that you have made a consumer proposal or declared bankruptcy. An “I,” “O,” or “R” in front of the number describes the type of credit:
- “I” is installment credit (e.g. a car loan) for which you pay a specified amount on a regular basis, for a specific period of time until the loan is paid off
- “O” is open credit (e.g. a line of credit or student loan) for which you borrow money, as needed, up to a specified limit
- “R” is revolving credit (e.g. credit cards) for which you make regular payments in varying amounts depending on the balance of your account
This is a “snapshot” of your credit history and includes your credit score and credit rating. It is one of the main tools that lenders use to decide whether or not to give you credit. Your credit report is updated on a regular basis by the companies that lend you money or issue credit cards, such as banks, finance companies, credit unions, and retailers.
Credit reporting agencies in Canada
Credit reporting agencies collect information about consumers’ financial affairs and sell that information to their business members, e.g. banks, credit unions, credit card companies, employers, insurance companies. This information is documented in the form of consumer credit scores and credit reports. Members use the information collected by credit-reporting agencies to determine the creditworthiness of borrowers. There are two major credit reporting agencies in Canada:
Equifax Canada Services – This agency offers products that allow you to access personalized credit information. The Equifax Credit Education Centre provides information about:
- Credit reporting
- Credit score
- Identity theft
- Consumer privacy
- Glossary of terms
TransUnion of Canada – This agency offers services to access your TransUnion credit report, tips for improvement, credit monitoring services like credit management, and identity theft protection.
It is important to note that, since these agencies operate separately, you should receive a copy of your credit profile from each agency. If you apply by mail, you can get your report with your credit rating and credit score for free. If you apply online, you can get your report with credit rating and credit score for a fee.
How bankruptcy, consumer proposals, or debt management plans affect your credit rating
Once your level of debt has become so great that a consumer proposal, debt management plan, or bankruptcy is required, your credit rating is usually at its lowest. A debt management program results in the same credit rating as a consumer proposal: an R7. A bankruptcy results in a similar credit rating of R9.
Talk to BDO in Halifax about the benefits of filing a consumer proposal instead of entering into a debt management plan.