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What is a credit report

A credit report shows your personal financial history and works as a kind of report card credit lenders view when deciding to do business with you.

09 May 2024Tassie Milne 5 min read
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Let’s face it: it’s probably been a while since you received a report card. Between your grades and the teacher’s notes, report cards serve as a reflection of habits that propel you forward or hold you back as a student. But here’s good news: we still get report cards issued for us as adults. They’re called credit reports.

A credit report is a detailed summary of your personal financial history. It considers many factors to come up with a score between 300 and 900, – depending on the scoring model – estimating how likely you are to pay your bills in full, on time. These factors include:

·   Personal information like your social insurance number, aliases or former names, and current and former addresses

·   Employer information including former and current employers

·   Account information like payment history, account balances, credit limits, and dates your accounts were opened or closed

·   Public records like bankruptcies, accounts in collections, and court judgements

·   Inquiries, which list the lenders and any companies that have pulled your credit report

It’s normal for your credit score to fluctuate as your file is updated with new history, usually once a month. Generally the higher your score, the more consistent you are with repayment. That makes you a more attractive borrower to lenders who offer loans for mortgages, phone plans or car leases to name a few.

Any time you apply to borrow money or enroll in a postpaid plan, lenders send information about your accounts to credit reporting agencies, commonly known as credit bureaus. In Canada, the two most commonly known bureaus are Equifax and TransUnion.

Different bureaus use different scoring models to calculate credit scores, so it’s common to get varying scores. However, if you see something on your credit report that you believe is inaccurate or incomplete, or you see information you don't recognize, you can contact your lender directly or file a dispute with the credit bureaus to have it removed.

There are many ways to build and maintain good credit. Credit scores above 660 are generally considered good. Equifax and TransUnion have slightly different formulas for determining scores, but here are the factors they prioritize:

Payment History – 35%

  • Takeaway: Pay your bills on time, every time. This doesn’t just apply to loans and credit cards – late or missed payments on postpaid accounts, such as cable or internet, may impact your credit score. Never skip a payment, even if you’re disputing a bill.

Payment history is the most important factor to your credit score. Lenders use recent payment history to gauge how likely you are to pay back loans or any other consumer debt you may hold. The older the payment history, the less impact it makes on your score. Your credit report will also detail whether you paid back debt as agreed, early or late, in full, or whether payments were missed or deferred. Your credit report will also detail whether you have any balances in collections, and if there are any bankruptcy filings or liens against you.

Credit bureaus don’t tell us how many points are knocked off depending on the act, but we can assume that the higher your credit score is, the more points you’ll lose for poor debt habits. If you had a lower score to begin with, new negative habits won’t impact your score as much.

Credit Utilization – 35%

  • Takeaway: Keep your credit card balance under 35% or less of your limit. A higher balance compared to your credit limit may impact your credit score.

Credit utilization is the ratio between how much credit you’re using and the total amount of credit available to you. For example, if your credit card has a $10,000 limit, and you have a balance of $2,000 on it, your credit utilization is 20%. Lowering your credit utilization rate, if possible, can help improve your score. Closing credit accounts can hurt your score by reducing your total available credit amount and instantly hiking your credit utilization ratio.

Length of Credit History – 15%

  • Takeaway: The sooner you start building credit, the better. Use your credit regularly to build good credit over time.

Creditors want you to have a long and consistent credit history to validate your score. Those who have a short history, or don’t use their credit regularly, are seen as being at greater risk of defaulting on their balances.

Diversity of Credit – 10%

  • Takeaway: The more diverse your credit history, the better. This shows lenders that you're responsible with all types of credit.

This one goes hand-in-hand with length of credit history. Similar to diversifying an investment portfolio, credit diversity refers to how many types of responsible credit products you have like loans, credit cards, and lines of credit.

Soft and Hard Credit Inquiries – 10%

  • Takeaway: Apply for new credit sparingly. Applying for multiple credit accounts in a short amount of time may negatively impact your credit score.

A ‘soft check’ happens when you or another entity reviews your credit history for non-lending purposes, which has no impact on your credit score.

A ‘hard check’ happens when you apply for a credit card or loan and is a full pull of your credit report. Too many hard checks in a short period of time can negatively affect your credit score. Applying for more than one credit product at a time is called ‘credit shopping’ and is considered to be a sign of financial difficulty, making you a less attractive candidate for lenders.

Now that you’re a credit report expert, let’s get you up to speed on credit score ranges:

  • Excellent (800-900): Roll out the red carpet! Consumers with excellent credit reap the rewards of having no recent late or missed payments, consistently low credit utilization, and multiple products on their credit report. These VIP benefits may include: pre-approvals for credit cards and loans, high credit and loan limits, as well as the lowest interest rates.

  • Very Good (740-799): Consumers in this range rarely make late payments and keep their credit utilization low. They’re considered financially responsible and enjoy low-interest rates on loans, as well as qualify for most top-tier credit cards on the market, with some exceptions.

  • Good (670-739): Consumers in the mid to lower end of the average range have likely made a few late payments recently to more than one lender and may have defaulted on a loan before. These borrowers will likely be offered relatively high-interest rates from lenders, though a good credit score will at least qualify you for some worthwhile unsecured credit cards.

  • Fair (580-669): Consumers with below-average credit will face higher interest rates for any lines of credit they are approved for, which can cost quite a bit of money over time. They also are not eligible for the more lucrative credit cards that provide accelerated levels of cashback and rewards.

  • Poor (300-579): Consumers in this range likely defaulted on multiple loans, have combined debt very close to their total credit limit, or may have declared bankruptcy, which stays on your credit report for at least seven years. These borrowers will have a hard time getting standard credit cards or loans, but can improve their scores by repaying credit they’re approved for via a secured credit card or a special loan.

Knowing how to read your credit report will help you understand how to improve your credit score. Remember to monitor your credit reports regularly to keep an eye out for possible identity theft and fraud.

Tassie Milne Image

Written by Tassie Milne

General Manager - ClearScore Canada

Tassie heads up ClearScore Canada. She lives in Toronto with her husband and two young boys. In her free time, she can be found at the family lake house or playing ball hockey.