Let’s be clear: Your Credit Score DemystifiedPosted on by Eugene Migus
Being in debt is one thing – although, if you’re currently in debt you know that it affects several aspects of your life in more ways than one. But while being in debt is the current issue, are you, like millions of Canadians, worried about the effect that living with debt is having on your credit score and your future ability to access credit?
How did I get my credit score?
The credit bureaus adjust individuals’ ratings based on monthly reports they receive from lenders on their borrowers – ‘borrowers’ meaning you. Some lenders report to both Equifax Canada and Trans Union Canada, and others only report to one or the other. Additionally, on a monthly basis, the Office of the Superintendent of Bankruptcy Canada reports to the Credit Bureau on individual filing-for-bankruptcies or consumer proposals, or they report on those who have received their subsequent discharges.
What are they reporting on?
Payment history. Late payments, collections, proposal or bankruptcy.
Amounts owed. Percentage of balance owed against your allowed limits.
Length of credit history. How long have accounts been open and used.
Types of credit. Revolving credit (cards/lines of credit) versus installment loans.
New credit. Opening new credit accounts negatively affects the score for a short time. This category also penalizes for hard inquiries to a credit profile. Hard inquiries happen when a lender is given permission to pull a credit bureau report for the purpose of granting credit, as opposed to soft inquiries which include you accessing your own credit report, or inquiries made by insurance agencies, employers etc. The credit score will be penalized when there are numerous hard inquiries in a short period of time. So avoid credit shopping.
R1 – R9: what do they mean?
Both Equifax and TransUnion operate on an ‘R-rating’ system on a scale of R0 – R9.
The “R” indicates that the item being described involves revolving credit.
R0 – Too new to rate; approved but not used
R1 – Pays (or paid) within 30 days of payment due date or not over one payment past due
R2 – Pays (or paid) in more than 30 days from payment due date, but not more than 60 days, or not more than two payments past due
R3 – Pays (or paid) in more than 60 days from payment due date, but not more than 90 days, or not more than three payments past due
R4 – Pays (or paid) in more than 90 days from payment due date, but not more than 120 days, or four payments past due
R5 – Account is at least 120 days overdue, but is not yet rated ‘9’
R6 – This rating does not exist
R7 – Making regular payments through a special arrangement to settle your debts
R8 – Repossession (voluntary or involuntary return of merchandise)
R9 – Bad debt; placed for collection; moved without giving a new address or bankruptcy
(You might also see ‘I’ – Installment credit, and ‘O’ – Open lines of credit)
The lower the R-rating score, the better.
You will probably have a sense of whether your credit score is in good shape or not by your current ability or non-ability to keep up with your bills and repayments, and by whether you are already involved with collection agencies or court action.
So what’s the damage?
Your credit score is an assessment of your financial health at a specific point in time. It indicates the risk you represent to lenders and is used by them to determine whether or not to give you credit (including limit increases), as well as being used by financial institutions when deciding the rate of interest and repayment terms for a loan or mortgage.
If this is important to you, then it is advisable to obtain your credit report so that you can take action if you are surprised or worried by what you discover.