When you rented or purchased a home, applied for a credit card or bought a car, you probably heard the term “credit rating” or “credit score.” But how is a credit rating calculated and used? What impact does it have on your loans? To find out more, check out this financial column by financial planner Julie St-Cyr.
Your credit rating is one of the pieces of information in your credit report. It helps lenders assess the level of risk when they give you credit or a loan. In other words, creditors want to know that your loan will be repaid, your credit payments made on time and your rent paid.
If you have a good credit rating, you’ll find it easier to obtain credit, a line of credit, a loan, a home or a vehicle, and you may get better interest rates.
Calculated using a mathematical formula, your credit rating is a number between 300 and 900 that determines your creditworthiness:
However, lenders use different credit rating models depending on the business they’re in. As a result, the values obtained may differ significantly.
Even though a high rating is preferable, there is no perfect value for getting the best rates and terms, as each financial situation is unique1.
Your credit rating is based on five factors that affect your score:
You can check your credit rating with most financial institutions free of charge, in the same way as you check your debit or credit card balance. However, you won’t be able to request a correction if there’s an error.
No matter what your plans are when it comes to applying for credit, developing good financial management habits, such as regularly using a budget template and cutting expenses, will help you maintain a high credit rating.
Your credit score is always changing; it goes up and down based on your financial behaviour. There are many ways to improve it; it’s never too late to form good habits!
If your credit rating is low or poor, there are a number of ways you can improve it over time:
Ask your financial institution for a credit card with a security deposit. Your bank will then ask you to make a deposit to secure your credit limit. The maximum limit will be $1,000. This may be a good way to get back on track, especially after bankruptcy.
Credit-reporting agencies are subject to rules that determine who can look at your credit report. Generally speaking, these are people, organizations and companies with whom you will be doing business, such as the following:
All the information in your credit report, such as your credit score, is collected, updated, compiled and stored by two agencies in Canada: Equifax and TransUnion. The information relates to Canadian creditors only. The two agencies may share your credit rating and credit report information with authorized individuals, companies and organizations upon request.
The credit report provides a summary of your credit history. It is automatically created when you first apply for credit or borrow money.
You can get your credit report and rating free of charge online from Equifax or TransUnion. You can also request a copy of your report in writing, several times a year. Such requests are recorded in your report but do not affect your credit score.
Your report contains information that is updated over time with data sent to the credit bureaus by various debtor organizations. It includes the following:
The information that goes into your credit report, which contains your credit rating, is provided by companies, organizations and service providers such as the following:
Please note that your advance consent is required for any request to provide your credit report, and therefore your credit rating, to a third party.
Julie St-Cyr, Financial Planner