One thing uppermost in the minds of many Canadians who are in dire financial straits is finding a solution that won’t destroy their ability to get credit in the future when their situation improves. What does it mean to have “good credit?” You’ve read about your credit rating, your credit score, and your credit report. What do each of these terms mean?
In most cases, a credit rating and a credit score mean the same thing and the terms are used interchangeably, although there are some differences. It’s a summary number that tells a potential creditor how “credit-worthy” you are. A credit report is a complete record of your credit history from which the credit rating or credit score is derived.
Technically, the correct term for your summary number is credit rating. However, because the number can be based on a 9-point scale or on an aggregate or composite number based on different variables, there is some confusion. The most commonly used summary number is a credit “score” – like 650 or 800 or 700 – like the FICO system you may have heard about. What goes into the score are things like payment history, number of accounts with high balances, number of credit inquiries, total debt, and so on.
An example of a credit “rating” is an R9 – where the R stands for revolving credit and the 9 means your debts are in collection. It’s the lowest rating possible. Other letter designations used are I for installment loans and O for open lines of credit. These ratings are typically assigned to individual creditors within your credit report.
Regardless of whether your summary number is 700 or a series of R5s, here’s what you really need to know about your credit rating.
First, the number not only impacts your ability to get credit but also how much you will pay for the privilege. Credit histories are maintained by reporting agencies and used by lenders to determine credit worthiness. Canada’s major reporting agencies are Equifax, TransUnion, and NCB. How do lenders use your rating or score?
Each lender has its own standards and although the credit report contains detailed information that can explain a lower score, some lenders won’t even look at an application that falls below a certain score. There are also higher costs of borrowing associated with lower scores.
Second, the credit report itself can be complex and confusing and more often than not contains information that is not correct. You need to stay on top of your credit report to ensure its accuracy. You are entitled to a free copy of your credit report every year.
Third, many Canadians are unaware they have the right to include Consumer Statements in their credit reports. If you are in financial difficulty through no fault of your own, you can add a written statement explaining your situation to your report.
Fourth, while you can use the Internet and other sources to learn how to improve your credit rating over time and monitor it continuously for accuracy, you need to know your efforts need to be multiplied by three. You don’t always know which of the 3 major reporting agencies a lender is going to use so there is little point in working only on your Equifax report. For more information on your credit rating, the Financial Consumer Agency of Canada has an excellent publication on their website at: http://www.fcac-acfc.gc.ca/.