Credit is a priviledge we all work very hard to earn. Sometimes, for whatever reason black marks can appear on our credit score. These can have a negative impact when a lender is deciding to extend credit to an individual. Almost 80% of all adults have at least one black mark on their credit report.

What is a credit report?

A credit report is a history of how consistently you pay your financial obligations. A credit report is created when you first borrow money or apply for credit. On a regular basis, the companies that lend money or issue credit cards to you send the credit reporting agencies specific and factual information about their financial relationship with you. The type of information shared is:  when you opened your account, if you make your payments on time, if you miss a payment or if you have gone over your credit limit, etc.

Because your credit report contains all the information received from your lenders and provides a picture of your financial health, other lenders will request your report when they are determining whether or not to grant you a loan. Your credit report is a history that will help them determine what kind of lending risk you are, determining if you are likely to repay your obligation on time or not.

What is a credit score?

A credit score is a statistical formula that translates personal information from your credit report and other sources into a three-digit score. For example, when you fill out a loan application, pieces of information from the application along with information from your credit report will be used to compute a score that indicates to the lender the statistical probability that you will become delinquent on the loan.

Some scores that lenders use are based strictly on the data in your credit report. These are known as "bureau scores". The most widely-used bureau scores in Canada were developed by Fair, Isaac and Co., headquartered in San Rafael, California.

It is important to understand that a credit score is only one criteria that a lender will use in making decisions. For example, in mortgage lending, the lender will take into account the property being purchased and the homeowner's equity. Many lenders look at their relationship with the customer, which may include other financial services. Each lender will have its' own policies and you should feel comfortable asking a credit institution about these. Our work with credit grantors has shown us that most lenders want their customers to have a better understanding of their lending processes.

What is used to calculate my score?

  • Payment history - Indicates whether you have made your credit card payments, loan payments and other payments on time.
  • Amounts owed - Compares how much you owe to your credit limits with various lenders
  • Length of time in file - Indicates how long you have had credit accounts
  • New credit - Shows how often you are looking for new credit and how you handle accounts you have recently opened.
  • Type of credit - Considers the type of loans you have - car loans, lines of credit, credit card balances

What can I do to improve my credit score?

Pay all of your bills on time. Paying late, or having your account sent to a collection agency has a negative impact on your credit score.

Try not to run your balances up to your credit limit. Keeping your account balances below 75% of your available credit may also help your score.

Avoid applying for credit unless you have a genuine need for a new account. Too many inquiries in a short period of time can sometimes be interpreted as a sign that you are opening numerous credit accounts due to financial difficulties, or overextending yourself by taking on more debt than you can actually repay. A flurry of inquiries will prompt most lenders to ask you why?  They may even decline to extend credit.

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