Credit is the ability to obtain goods or services before payment, based on the trust that payment will be made in the future. Credit can take many forms including:
- Personal Loan
- Auto Loan
- Line of Credit
- Credit Cards
- Post-Paid Services such as Phone Bills and Electricity Bills
WHY DO I NEED CREDIT?
Credit is an essential part of life in Canada and has greatly increased the standard of living. For example, without access to credit, you would have to save up the full amount of a car or a house prior to purchasing it. There are also many daily tasks that can’t be done without credit such as renting a car, paying for gas at the pump, or buying anything online.
WHAT IS A CREDIT REPORT?
A credit report is a history of credit transactions that have been reported to the credit rating agencies. These credit rating agencies, known as credit bureaus, take credit information from many different businesses and public records about you and compile it into a single report. Your credit report will show details about which lenders you have applied for credit with, what loans you have taken out, what your payment history was like on each loan and if the loan is still active or has been paid off. Various businesses, including lenders, then use the information in your credit report, along with your credit score, when determining if they will offer you credit.
WHAT IS A CREDIT SCORE?
A credit score is a numerical representation of the amount of risk that the lender takes in extending you credit compared to other consumers. Each credit bureau and even many lenders have their own calculations and methods that they use to calculate your credit score. One of the most popular scores used by many financial institutions is the Beacon Score. Beacon scores range from 300 to 900 with an average near 700.
While the exact formula for the Beacon Score isn’t public, it is based roughly on the following factors:
- Past payment history – do you pay on time? About 35%
- Amount of credit outstanding – how much do you owe? About 30%
- Age of credit file – how long have you been borrowing? About 15%
- Applications for credit – have you recently applied for credit? About 10%
- Types of credit – Do you have a mix of credit types (Credit cards, loans, mortgage)? About 10%
WHAT ARE THE MOST COMMON FACTORS THAT NEGATIVELY AFFECT CREDIT SCORE?
The most common factors that negatively affect a credit score are:
- Loans going to collections
- Amount owed on accounts is high
- Accounts being close to credit limit
- Large number of accounts
- Accounts have not been established long
- Bankruptcies, Consumer Proposals, and Judgments
HOW CAN I GET MY CREDIT REPORT AND SCORE?
Your credit report is available free of charge by the two credit bureaus in Canada:
- Equifax – www.equifax.ca
- TransUnion Canada – www.transunion.ca
Both companies also offer enhanced credit reports including your credit score and other products like credit monitoring and identity theft protection which are available by paid subscription.
HOW CAN I RE-ESTABLISH CREDIT?
Whether you have been bankrupt, filed a consumer proposal, have a poor credit history, or have little credit history, establishing your credit is very important. The process for establishing your credit can be broken down into three easy steps.
1. Straighten out your finances
This requires generating a budget to see your monthly cash income and your monthly expenses to ensure that you are not overspending your income.
2. Obtain good credit
To obtain good credit you will need to apply for credit, that will be able to report your payment history to your credit profile.
3. Make Payments On Time
This is the most important step. Your lenders will report all your payments to your credit profile so you will need to ensure that you make all of your payments on time and don’t miss any.