Serious question: do you know, generally, what your credit score is? Have you checked your credit report yet this year?
If your answer is no, here’s a tip: Make it a New Year’s Resolution to check your credit report once a year.
That’s it, just once a year – so easy!
As easy as it is though, Canadians on the whole are not that great about understanding their credit.
A recent survey, commissioned by Mogo, found that while 72% of Canadians recognized that lenders and banks look at credit scores during the loan application process, most Canadians don’t know what else their score is used for:
- 81% of Canadians don’t realize that an employer may check their credit score when being considered for a job position
- A full two thirds of Canadians don’t know that insurance agencies or cell phone companies might look at credit scores during the application process (67% and 66%, respectively)
- 61% of Canadians don’t know that landlords often look at credit scores as part of a rental application
Don’t be a statistic, guys, you’re better than those people.
Here’s the skinny on credit reports and credit scores:
First: your credit score and your credit report are two different things.
Think of them as a polaroid vs. a photo album- your credit score is a snapshot of your financial information at one specific point in time, while your credit report shows you a whole history of transactions and accounts over time (up to 7 years).
The Credit Report
Your credit report shows your financial history where credit is concerned. The report records things like:
- when you borrow money (like that student loan)
- when you apply for credit (like financing a new car or getting a new credit card)
- when you use your credit card to buy things
- when you subscribe to a service, like your internet or your cell phone bill
- when you pay your bills
Every time you do any of these things, that transaction is recorded and sent to a credit reporting agency, which then summarizes the information in the credit report.
That credit report is then used to give you a credit score. (It’s the ciiiircle, the circle of liiife)
Why bother checking your credit report?
If you have a good handle on money tracking already, the credit report shouldn’t show you anything you don’t already know. But mistakes can and do happen, and checking your report is an easy way to verify and get anything updated.
On top of that, the burden is on you to fix it, not on the credit bureau, so if you’re out any money because of the mistake, that’s on you.
The other, scarier thing to consider is that your credit report is also a way to ensure there aren’t any accounts being opened in your name without your knowledge. Identity theft is a bitch, people.
What’s in your credit report?
When you check your report, you’re going to want to review everything in it to make sure it’s accurate. Your report includes your identification information:
- Your name
- Date of birth
- Current and past addresses and phone numbers
- Your SIN
- Your driver’s licence number
- Your passport number
- Current and past employers
And your credit history information:
- Credit accounts and transactions, like your credit cards (including store credit cards), lines of credit, and loans
- “Telecommunications” accounts, like your cell phone and internet bill
- Your mortgage and payments
- Any negative things, like owing money to the bank, committing fraud, or writing bad cheques
- Financial information that is of public record, like if you declared bankruptcy, had a lien registered to you, or had legal judgments made against you
- Debt sent to collection agencies
- Inquiries from anyone who requests your credit report (more on that below)
The Credit Score
Your credit score is a number between 300 and 900, with 900 being a perfect score, and most Canadians hovering around 700. Anything under 650 is not particularly good and could mean you won’t qualify for a loan.
There are 6 factors that go into generating your score:
- How much credit you have vs. how much money you owe (using up all of your available credit reduces your score, while having unused credit available can help)
- How long you’ve had credit (longer, more stable credit typically means a higher score)
- The type of credit you have (for example, credit card is one type, cell bill is another, mortgage is another, etc.)
- Your payment history (missing payments reduces your score, no matter the size of the payment)
- How often you try to get more credit** (opening a lot of credit cards in a few months, for example, is risky)
- Any bankruptcy claims
A lot of people think that just checking your credit score in itself lowers your credit score. Those people are wrong.
It is true that your score can get dinged when there’s a high number of checks, but it depends what kind.
Soft checks are when you check your own credit; when businesses are checking your credit to see whether they should offer you services (like insurance); or when businesses that you already hold credit with (like your bank) do a check to review your credit status. Soft checks don’t lower your credit score.
Hard checks are when a lender looks into your credit because you applied for a credit card or to borrow money. Hard checks do drop your score, and generally by 7 points each. And that’s for someone who has a long, stable credit history – it can be more, if you have short or limited credit.
Why does your credit score matter?
For most of your day to day business, honestly, it doesn’t. (womp womp)
But if you’re looking to borrow money – say you want to finance a new car, or you want to take out a line of credit, or buy a house with a mortgage – the lenders are going to take a look at your score.
If you’re applying for a new job or looking to rent an apartment, there’s a good chance your employer or your landlord will look at your credit score too.
The higher your score, the lower the risk of lending to you. In some cases, having a higher score can even qualify you for better interest rates.
What score is acceptable to your lender is up to that lender – for example, you might only need a score of 650 to finance your new car, but to get a mortgage, you might need at least 700 (these are fictional examples – make sure you check with your own lenders before assuming the required score).
How to improve your credit score:
- Pay your bills on time.
- Pay down your debts, then pay them off for good.
- Avoid using all your available credit.
(The rule of thumb is not to go over 50% of your available credit. For example, if you have a $6,000 credit limit on your card, avoid holding more than $3,000 on it at any given time. If you’re really serious about improving your credit, try to stick to below 1/3.
- Only apply for credit when you really need it, to avoid damaging your score by applying lots of times in only a short period.
- Be aware when a lender is checking your score – they can’t do it without your permission, but you might be signing away your consent without realizing it (for example, it might be buried at the bottom of the fine print on your 14-page cell phone contract).
- When you shop around for mortgages and you`re at the stage of applying, do it quickly. Most credit tracking companies consider multiple hard checks over the span of 2 or 3 weeks as only one check, so your score only drops once. Take too long though and your score can be impacted by each check individually (take it from me – I learned this the hard way!)
How to check your score
These are the ones that the government will recommend to you, so they come with a good reputation, but they do cost money if you want to get your score. Your report though is free if you mail in the hard copy form (it costs extra to get it online instantly).
I order my report once a year, but I order a copy from both Equifax and TransUnion, because they sometimes have different information. I only order my score from one of them though, and I don’t care too much about it unless it somehow dropped drastically.
Recently, more players have come into the credit score game and they offer some new options: companies like Borrowell and Mogo will allow you to check your scores for free, usually instantly or in just a few minutes.
(Just be sure to pay attention what you`re signing up for because you might end up subscribing to the monthly check subscription rather than the one time deal.)
Mogo shared their survey results with me (clearly they understand my love of stats), but otherwise provided no incentive for me to write this post. I am not sponsored by them, nor do I specifically endorse their services.
Do you regularly check your credit score? If not, why not?