Ever since high school, you’ve known the importance of reputation. Then, like now, you were known for something. It could have been your skill at Scrabble or your spotless attendance at cheerleading practice (or math club!). But what if a false rumour started that you cheated on a test or had stolen your best friend’s boyfriend — you’d defend yourself, right? You’d want to set the record straight so people would give you the respect you deserve. The same rules apply to your credit rating.
Your credit rating is what banks, lenders, potential employers and landlords consult to help them decide if they can put their trust in you. And while most of us don't question its importance, not enough of us make sure our rating is accurate. And that's simply too big a risk to take with something so important - especially since identity theft is a fast-growing crime in North America.
How the system works
In Canada, there are two credit bureaus that keep track of consumers' credit records: Equifax and TransUnion. They assign you a credit score based on a number of factors, such as:
- Your payment history. A good record of on-time payments will help boost your score.
- Your outstanding debt. If you've reached 50% or more of your credit limit, it may harm your score. A balance of 30% or less is ideal.
- Your credit history. An established credit history makes you less risky as a borrower.
- Recent inquiries. Any time a lender or business checks your credit, it shows in your file. If there are lots of inquires, it can raise a red flag.
- Types of credit. A healthy credit profile has a balanced mix of credit accounts and loans.
Your file will also show your banking information (including a record of any NSF cheques), note any bankruptcies or judgments against you and list any history of interaction with collection agencies.
Why it matters
Any time you apply for a loan, sign up for preauthorized payments or apply for a credit card, the organization involved will probably check your credit rating. A good rating means that you're a good credit risk - you have an established history of paying your bills on time - and are likely to be approved for the loan or credit.
If you have a low credit score or no credit history, you may not qualify for a "standard" loan. The lender might charge you a higher interest rate or require a security deposit before advancing you the funds you need.
Checking your rating
Checking your credit rating is easy. Both bureaus will mail reports for free and offer immediate online access for about $15. It's a good idea to check your file annually, and after a major event such as a divorce, the death of your spouse, or theft of your wallet or personal papers. That way you can make sure the information is accurate and up-to-date, and that no one has been trying to borrow on your good name.
Mistakes can happen, however. Equifax and TransUnion simply compile the data they get from companies; they don't verify it. It's not all that unusual for mix-ups to occur among people with identical names, or when couples split up.
If you find an error in your report or you think there's been a mistake, contact the agency. They will review and investigate any dispute you have with a creditor. Based on the outcome, the agency may update your rating.
If you've been a victim of fraud, contact your bank, credit card issuers and the government (to protect your Social Insurance Number). You can also add a fraud alert to your credit file, so that anyone checking your history knows that someone else may be using your identity.
What can you do if the information in your file is accurate but your rating is not as stellar as you'd like? The following strategies can help repair a damaged rating:
- Set up preauthorized payments for your regular bills (utilities, credit cards, phone) so that your payments won't be late.
- Reduce your debt.
- Don't apply for any new credit cards or additional loans.
Your credit ally
Working with a financial professional is a good way to ensure your credit rating doesn't give you a bad reputation. It may mean that you need help managing debt or using your credit wisely. Whatever your situation, enlist the help of a professional to help make things right again.
