Being financially responsible is an important life skill to have and it is never too early to start. So, why is your credit score important?
Lenders want to have an idea of how your credit was in the past, to determine how well you are likely to handle it in the future. They will gauge from there how much they are willing to lend you, and at what rate.
Here's some tips to get you started:
Check your credit score
If you haven’t done so already, get your free annual credit report, or have your financial institution check your credit score.
*TIP*
Get a copy of your credit report every month and correct any mistakes you find.
If you believe that the information in your credit report is incorrect, contact the credit reporting agency and your financial institution. If the financial institution says that the information reported is correct but you are still not satisfied, you can submit a brief statement to the credit reporting agency. If the error came from your financial institution and the institution will not correct the error, you can file a complaint with the institution.
Why check your credit report
Your credit report is a record of how well you manage credit. Errors on your credit report can give lenders the wrong impression. If there's an error on your credit report, a lender may turn you down for credit cards or loans, or charge you a higher interest rate. You may also not be able to rent a house or apartment or get a job.
Errors can also be a sign that someone is trying to steal your identity. They may be trying to open credit cards, mortgages or other loans under your name.
Take a close look at your credit report at least once a year to see if there are any errors.
Errors to watch out for on your credit report
Once you get your report, check for:
- mistakes in your personal information, such as a wrong mailing address or incorrect date of birth
- errors in credit card and loan accounts, such as a payment you made on time that is shown as late
- negative information about your accounts that is still listed after the maximum number of years it's allowed to stay on your report
- accounts listed that you never opened, which could be a sign of identity theft
A credit bureau can’t change accurate information related to a credit account on your report. For example, if you missed payments on a credit card, paying the debt in full or closing the account won't remove the negative history.
Negative information such as late payments or defaults only stays on your credit report for a certain period of time.
Check your credit report for fraud
Look for accounts that don't belong to you on your credit report. Accounts that you don't recognize could mean that someone has applied for a credit card, line of credit, mortgage or other loan under your name. It could also just be an administrative error. Make sure it's not fraud or identity theft by taking the steps to have it corrected.
If you find an error on your credit report, contact lenders and any other organizations that could be affected. Tell them about the potential fraud.
If it's fraud, you should:
- contact Equifax Canada and TransUnion Canada to inform them about the fraud
- ask to put a fraud alert on your credit report
- report it to the Canadian Anti-fraud Centre
The Canadian Anti-Fraud Centre is the central agency in Canada that collects information and criminal intelligence on fraud and identity theft.
Add a fraud alert
A fraud alert, or identity verification alert, tells lenders to contact you and confirm your identity before they approve any applications for credit. The aim is to prevent any further fraud from happening.
Ask the credit bureaus to put a fraud alert on your credit report if:
- you've been a victim of fraud
- your wallet has been stolen
- you've had a home break-in
You may need to provide identification and a sworn statement to prove that you've been a victim of fraud.
You can set up a fraud alert for free with Equifax. TransUnion charges a fee of $5 plus taxes to set up a fraud alert.
Fix errors on your credit report
You have the right to dispute any information on your credit report that you believe is wrong. You may ask the credit bureaus to correct errors for free.
Step 1: Support your case
Gather receipts, statements and other documents related to your credit accounts. You may need them to prove your claim.
Step 2: Contact the credit bureaus
Both Equifax Canada and TransUnion Canada have forms for correcting errors and updating information. Fill out the form to correct errors:
Before the credit bureau can change the information on your credit report, it will need to investigate your claim. It will check your claim with the lender that reported the information.
If the lender agrees there is an error, the credit bureau will update your credit report.
If the lender confirms that the information is correct, the credit bureau will leave your report unchanged.
In some provinces, the credit bureau is required to send a revised copy of your credit report to anyone who recently requested it.
Step 3: Contact the creditor
You may be able to speed up the process by contacting the creditor yourself about the error. The creditor is the company you owe money to. Ask them to verify their files and provide the credit bureaus with updated information.
Step 4: Escalate your case
Ask to speak with someone at a higher level at the credit bureau or at your financial institution if you're not satisfied with the results of the investigation.
Federally regulated financial institutions must have a complaint-handling procedure to help resolve disputes between consumers and their financial institutions. This procedure includes a third-party dispute-resolution body.
Step 5: Add a consumer statement
If the credit bureau confirms the information is accurate but you're still not satisfied, submit a brief statement to your credit report explaining your position. It's free to add a consumer statement to your credit report. TransUnion lets you add a statement of up to 100 words, or 200 words in Saskatchewan. Equifax lets you add a statement of up to 400 characters to your credit report.
Lenders and others who review your credit report may consider your consumer statement when they make their decisions.
Make a complaint about a credit bureau
You may choose to make a complaint about a credit bureau.
Complain directly to the credit bureau
Escalate the issue if required
If you feel that a credit bureau has not treated you properly, you may file a complaint. This complaint can be made in writing to your provincial or territorial consumer affairs office. The federal government does not regulate credit bureaus.
You can get a copy of your credit report by mail for free, or online for a fee. The only way to obtain your credit score is online. There is a fee with the following sources:
Equifax Canada National Consumer Relations P.O. box 190, Station Jean-Talon, Montreal, Quebec H1S 2Z2 Toll-free: 1-800-465-7166 | TransUnion Canada TransUnion Attention: Consumer Relations 3115 Harvester Road, Suite 201 Burlington, Ontario L7N 3N8 Toll-free: 1-800-663-9980
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Improve your credit score
If you have had a low credit score in the past, you can improve it by using credit more carefully. Eventually, your score will improve, and it will be easier for you to get credit.
- Pay your bills in full and on time: At least pay the minimum amount shown on your statement. Set up automatic payments to ensure that your bills are paid on time.
- Don't go over the limit on your credit card: Keep your balance low—below 35 percent of your credit limit if you can. The higher your balance, the more it affects your credit score.
- Don't apply for credit too often: Too many lenders asking about your credit in a short period of time can lower your credit score.
- Pay off your debts as quickly as possible
- Build a strong credit history: You may have a low score simply because you don't have a long credit record. You can improve your score by using a credit card—and paying it off on time every month.
- Check your credit report about six months in advance if you plan to make a major purchase that will require you to take out a loan, like buying a house or a car. This will give you time to correct any possible errors and improve your score.
Monitor your payment history
Your payment history is the most important factor for your credit score.
To improve your payment history:
- always make your payments on time
- make at least the minimum payment if you can’t pay the full amount that you owe
- contact the lender right away if you think you'll have trouble paying a bill
- don't skip a payment even if a bill is in dispute
Use credit wisely
Don’t go over your credit limit. If you have a credit card with a $5,000 limit, try not to go over that limit. Borrowing more than the authorized limit on a credit card can lower your credit score.
Try to use less than 35% of your available credit. It’s better to have a higher credit limit and use less of it each month.
For example:
- a credit card with a $5,000 limit and an average borrowing amount of $1,000 equals a credit usage rate of 20%
- a credit card with a $1,000 limit and an average borrowing amount of $500 equals a credit usage rate of 50%
If you use a lot of your available credit, lenders see you as a greater risk. This is true even if you pay your balance in full by the due date.
To figure out the best way to use your available credit, calculate your credit usage rate. You can do this by adding up the credit limits for all your credit products.
This includes:
- credit cards
- lines of credit
- loans
For example, if you have a credit card with a $5,000 limit and a line of credit with a $10,000 limit, your available credit is $15,000.
Once you know how much credit you have available, calculate how much you are using. Try to use less than 35% of your available credit.
For example, if your available credit is $15,000, try not to borrow more than $5,250 at a time, which is 35% of $15,000.
Increase the length of your credit history
The longer you have a credit account open and in use, the better it is for your score. Your credit score may be lower if you have credit accounts that are relatively new.
If you transfer an older account to a new account, the new account is considered new credit.
For example, some credit card offers come with a low introductory interest rate for balance transfers. This means you can transfer your current balance to this new product. The new product is considered new credit.
Consider keeping an older account open even if you don't need it. Use it from time to time to keep it active. Make sure there is no fee if the account is open but you don't use it. Check your credit agreement to find out if there is a fee.
Limit your number of credit applications or credit checks
It’s normal and expected that you'll apply for credit from time to time. When lenders and others ask a credit bureau for your credit report, it’s recorded as an inquiry. Inquiries are also known as credit checks.
If there are too many credit checks in your credit report, lenders may think that you’re:
- urgently seeking credit
- trying to live beyond your means
How to control the number of credit checks
To control the number of credit checks in your report:
- limit the number of times you apply for credit
- get your quotes from different lenders within a two-week period when shopping around for a car or a mortgage. Your inquiries will be combined and treated as a single inquiry for your credit score.
- apply for credit only when you really need it
“Hard hits” versus “soft hits”
“Hard hits” are credit checks that appear in your credit report and count toward your credit score. Anyone who views your credit report will see these inquiries.
Examples of hard hits include:
- an application for a credit card
- some rental applications
- some employment applications
“Soft hits” are credit checks that appear in your credit report but only you can see them. These credit checks don't affect your credit score in any way.
Examples of soft hits include:
- requesting your own credit report
- businesses asking for your credit report to update their records about an existing account you have with them
Use different types of credit
Your score may be lower if you only have one type of credit product, such as a credit card.
It's better to have a mix of different types of credit, such as:
- a credit card
- a car loan
- a line of credit
A mix of credit products may improve your credit score. Make sure you can pay back any money you borrow. Otherwise, you could end up hurting your score by taking on too much debt.
Consult a financial advisor
Show your current stats to a financial advisor of choice and ask them to help you with a financial plan for the future. Take this day to invest in your future self.
Contact us for recommendations on financial advisors.
Source: Financial Consumer Agency of Canada