If you are looking to buy or rent a homes, you have probably been asked for your credit score. Most people have a general idea of what a credit score is, but don’t really know where it comes from, what it’s made up of and why it’s important to have a good credit score. This blog will look at what a credit score is and why it is important.

What is a Credit Score?

Basically, your credit report is a summary of your credit history. Your credit report is created when you borrow money or apply for credit for the first time. Lenders and credit card companies send information about your accounts to credit bureaus, also known as credit reporting agencies.

Your credit score is a three-digit number that comes from the information in your credit report. It goes from 300 (worst) to 900 (best). It shows how well you manage credit/finances and how risky it would be for a lender to lend you money.

Your credit score is calculated using a formula based on your credit report. Your credit score goes up if you use your credit responsibly, and you lose points if you have trouble managing your credit. Your credit score will change over time as your credit report is updated.

How a credit score is calculated

It’s impossible to know exactly how much your credit score will change based on the actions you take. Credit bureaus and lenders don’t share the formulas they use to calculate credit scores.

Factors that may affect your credit score include:

· How long you’ve had credit

· How long each credit (loan or credit card) has been in your report

· If you carry a balance on your credit cards

· If you regularly miss payments

· The amount of your outstanding debts

· Being close to, at or above your credit limit

· The number of recent credit applications

· The type of credit you’re using

· If your debts have been sent to a collection agency

· Any record of insolvency or bankruptcy

Lenders set their own guidelines on the minimum credit score you need for them to lend you money. If you have a good credit score, you may be able to negotiate lower interest rates. When you order your credit score, however, it may be different from the score produced for a lender. This is because a lender may give more weight to certain information when calculating your credit score.

Who Creates Your Credit Report and Credit Score?

There are two main credit bureaus in Canada: Equifax and TransUnion.

These are private companies that collect, store and share information about how you use credit. Equifax and TransUnion only collect information from creditors about your financial transactions in Canada. Some financial institutions may be willing to recognize a credit history outside Canada if you ask them. This may involve extra steps. For example, you may request a copy of your credit report in the other country and meet with your local branch officer.

Who can see and use your credit report?

Credit bureaus follow rules that define who can see your credit report and how they can use it. The organizations/people that are allowed to see your credit report include:

· Banks, credit unions and other financial institutions

· Credit card companies

· Car leasing companies

· Retailers

· Mobile phone companies

· Insurance companies

· Governments

· Employers

· Landlords

These businesses or individuals use your credit report to help them make decisions about you. These decisions could include:

· Lending you money

· Collecting a debt

· Considering you for rental housing

· Considering you for a job

· Providing you with insurance

· Offering you a promotion

· Offering you a credit increase

A lender or other organization may ask to “check your credit”. When they do so, they are asking to access your credit report at the credit bureau. This results in an inquiry in your credit report. Lenders may be concerned if there are too many credit checks, or inquiries in your credit report, as it could mean you are urgently seeking credit or trying to live beyond your means.

Consent and Credit Checks

In general, you need to give permission for a business or individual to use your credit report. Ontario requires written consent to check your credit report (this is not the case in all provinces). When you sign an application for credit, you allow the lender to access your credit report. Your consent generally lets the lender use your credit report when you first apply for credit. They can also access your credit at any time afterward while your account is open.

In many cases, your consent also lets the lender share information about you with the credit bureaus. This is only the case if the lender approves your application.

What's Included In Your Credit Report?

Your credit report contains personal, financial and credit history information. In general, it takes 30 to 90 days for information to be updated in your credit report.

Your credit report contains the following personal information:

· Name

· Date of birth

· Current and previous addresses

· Current and previous telephone numbers

· Social Insurance Number

· Driver’s licence number

· Passport number

· Current and previous employers

· Current and previous job titles

Your credit report contains the following financial information:

· Non-sufficient funds payments or bad cheques

· Chequing and savings accounts closed “for cause” due to money owing or fraud committed

· Credit you use including credit cards, retail or store cards, lines of credit and loans

· Bankruptcy or a court decision against you that relates to credit

· Debts sent to collection agencies

· Inquiries from lenders and others who have requested your credit report in the past three years

· Registered items, such as a car lien, that allows the lender to seize it if you don't pay

· Remarks including consumer statements, fraud alerts and identity verification alerts

Your credit report contains factual information about your credit cards and loans, such as:

· When you opened your account

· How much you owe

· If you make your payments on time

· If you miss payments

· If your debt has been transferred to a collection agency

· If you go over your credit limit

· Personal information that is available in public records, such as a bankruptcy

Your credit report can also include chequing and savings accounts that are closed “for cause”. These include accounts closed due to money owing or fraud committed by the account holder.

Other Accounts Included in a Credit Report

Your mobile phone and internet provider may report your accounts to your credit bureau. They can appear in your credit report, even though they aren’t credit accounts.

Your mortgage information and your mortgage payment history may also appear in your credit report. The credit bureaus decides if they use this information when they determine your credit score.

A home equity line of credit (HELOC) that is added to your mortgage may be treated as part of your mortgage in your credit report. If your HELOC is a separate account from your mortgage, it is reported separately.

Why Your Credit Score Matters

Your credit score affects your finances on all levels.

Financial institutions look at your credit report and credit score to decide if they will lend you money. They also use them to determine how much interest they will charge you to borrow money. If you have no credit history or a poor credit history, it could be harder for you to get a credit card, loan or mortgage. It could even affect your ability to rent a house or apartment or get hired for a job.

If you have good credit history, you may be able to get a lower interest rate on loans. This can save you a lot of money over time, especially for something as sizable as a mortgage.

What Are Credit Scores and Why Are They Important?

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