How to Read and Understand Your Credit Report By Michael Goldenberg, CEO of DebtCare Canada 1
Table of Contents Chapter Page Overview 3 Chapter 1 - What is a Credit Report? 4-5 Chapter 2 - Canadian Credit Reporting Agencies 6-8 Chapter 3 - How to Read Your Credit Report 9-11 Chapter 4 - Credit Score 12-13 Conclusion 14 Author Bio 15 2
Overview Knowing how to read and understand your credit report is incredibly important. Your credit report is used for a variety of different everyday things, and so knowing what is contained within the report and what each thing means is crucial. When it comes to your credit report, having good credit is always better than having bad credit. When your credit is considered good, this indicates to those institutions you go to for financial funding that you are financially secure and not a strong financial risk. On the other hand, when your credit is considered bad, potential lenders will likely perceive you as high risk and securing funding may be more difficult. Why is this? What does good credit or bad credit mean and how are these measured? And who exactly does the reporting? These are just some of the questions that this e-book sets out to break down and explain. 3
Chapter One What is in a Credit Report? 4
Chapter 1 - What is a Credit Report? Let s start at the beginning. To understand how to read your credit report, it might be helpful to know what your credit report is first. This is a document which provides a total breakdown of your credit behaviour. Any credit products you have (loans, credit cards, etc.), as well as the amounts owing and recent payment history, are included in this report. Additionally, your credit report contains an overall credit score which represents your overall credit behaviour. What are these reports used for? Credit reports are important for a number of different things, the most important purpose being to explain, in detail, in one single document, your credit history and behaviour. These reports are used by financial institutions when setting up mortgages, car finance companies when considering loans, and even by some rental companies when you are looking to lease an apartment. Other people who use credit reports may include employers, who may check your credit report when hiring, or insurance companies when you are looking to purchase an insurance policy. How are they used? Below you will find a detailed explanation of how to read your own credit report, but for now let s just say that these companies use your report to determine whether or not you are a good investment when it comes to lending money and whether or not your credit history represents a safe bet that you will be able to meet your payment requirements. 5
Chapter Two Canadian Credit Reporting Agencies? 6
Chapter 2 - Canadian Credit Reporting Agencies So who compiles this information? In Canada, there are two main credit reporting agencies, also called credit bureaus: Equifax and TransUnion. These are privately owned companies that collect your credit information from creditors when you apply for or receive credit. They are required to abide by certain regulations set out by the Consumer Reporting Act, meaning your information is protected with them. Creditors who report to the credit reporting agencies: - Banks - Finance companies - Credit Unions - Utility providers - Cell phone service providers - Rental companies - Insurance companies - Employers When these institutions send information to the reporting agencies, the agencies then compile it all and maintain it regularly. Conversely, when you give any of these types of institutions permission to access your credit report, the credit reporting agencies will sell the compiled information to them (in the form of your credit report). The role of these agencies is not to make judgments or recommendations based on the information provided to them - nor do they find the information - all they do is keep track of it in a report and provide it when requested. Can you request your credit report from these credit reporting agencies? 7
Yes. You can request your credit report from both Equifax and TransUnion online after verifying your identity of course. Both companies will also provide a copy of your credit score (we will cover credit score later). Keep in mind that there is a charge for requesting these documents. 8
Chapter Three How to Read Your Credit Report? 9
Chapter 3 - How to Read Your Credit Report Ok, so now you know what a credit report is and where the information contained within it comes from but how do you make sense of that information? Here is a breakdown of the different sections of your credit report and how to understand each section. When looked at as a whole, these sections give a detailed picture of your credit behaviour. Different institutions use this to decide whether or not to extend credit to you. This is why it is important to understand what is contained within the report so that you can spot any discrepancies. Personal Information Name, date of birth, address, social insurance number, past employment (if available) Summary of Your Credit Any accounts you have, the types of accounts, whether they are open or closed, and balances Any delinquencies Credit inquiries from previous 2 years Explanation of Your Accounts Trade line for each account - This is where your accounts are broken down and your credit habits are reported. What information do these trade lines include? - Date the account was opened - Creditor - Portion of account number (for security) - Credit limit 10
- Current balance - Repayment terms - Date of last activity - Number of months reported to the credit report - Number of times a payment has been 30, 60 or 90 days late - A rating Credit Ratings: Each credit product has a rating depending on the type of product: - R Revolving: balance revolves (e.g. line of credit or credit card). When you pay off a portion of the balance, that money becomes available again. - I Installment: balance decreases (e.g. car loan). When you pay off a portion of the balance, that money is considered paid and is no longer available. - O Open: balance can be revolving, but payment in full is required by a certain date (e.g. student loans). These letters are followed by a number indicating payment habits: - 1 = up to date - 2 = 30 days in arrears - 3 = 60 days in arrears - 4 = 90 days in arrears - 5 = 120 days in arrears - 6 = usually not used - 7 = credit counselling - 8 = repossession - 9 = bad debt write off Public Records Anything that is part of public record - tax liens, bankruptcies, etc. 11
Chapter Four Credit Score 12
Chapter 4 - Credit Score Your credit score is separate from your credit report, but when a lender requests your credit report they also receive your credit score. Your credit score is calculated based upon the amount of credit you have, your credit limits, late payments, liens or bankruptcies, etc. FICO and Beacon Scores: FICO and Beacon scores are two types of credit scores. Although similar, they are not actually the same, and it helps to know the difference. FICO stands for Fair Issac and Co., a company that creates credit scoring models and analyzes risk. FICO is generic and forms the basis for the Beacon score. Beacon is an Equifax creation a branded FICO score. The only difference between a Beacon score and a FICO score is that a Beacon score only uses the information contained within your Equifax credit report. Credit Score Scale: Your credit score is based on a scale from 300-900. The higher your credit score, the better your credit. Here is a breakdown: - 300-559 poor - 560-659 fair - 660-724 good - 725-759 very good - 760+ - excellent 13
Conclusion We hope that you have found this e-book useful. If you have read through it in its entirety, it is likely pretty clear why being able to read and understand your credit score is so important. When your score is high and your report is positive, securing credit is much easier than if you are dealing with bad credit. It is really important to check your credit report on a regular (but not too regular) basis to ensure that all information is correct. If it is not, and you find a discrepancy, it is essential that you contact the credit reporting agency immediately to have the incorrect information fixed. Have you checked your report or score lately and notice that it isn t as high as you thought it might be? Wondering how to get it back up? For information about how to rebuild credit contact DebtCare by calling 1-888-890-0888. 14
Author Bio This e-book was written by Michael Goldenberg. Michael Goldenberg is the founder and President of DebtCare Canada Inc. DebtCare Canada offers a service for those who struggle with debt. When Michael formed DebtCare Canada he refused to offer the typical credit counselling/debt services offered by other credit counselling agencies. Seeing that many bankruptcy trustees and credit counselling agencies are one dimensional, Michael formed a multi-faceted team. A group of senior financial consultants, credit counsellors, advocates, accountants and in-house legal counsel offer clients a turnkey solution. Currently, Michael s role as President of the organization has him establishing and negotiating strategic partnerships that enable DebtCare Canada to set a new standard in the financial consulting industry. Contact Michael at: mgoldenberg@debtcare.ca. 15