What is a Credit Rating & a Credit Score?
Your credit rating is a measure of your perceived financial ‘health”. From a statistical point of view, your credit rating reflects how likely you are to make your payments on time your ability repay debts.
It would take a lot of work for lenders to send out a personal investigator to check up on you or had to call your friends and family, talk to your neighbours or boss to find out if they can trust you, and in the end, the information they get might be very subjective. It is much more cost effective for lenders to create a record of your financial activities and then give scores to these financial activities based on whether those types of activities will potentially help or hurt your overall financial situation. We call a collection of all of these financial activities a credit report. This report generates a score based on all of your activities and is called your credit score. Your credit score and your credit report together form your credit rating.
The types of financial information that is recorded on a credit report include all types of revolving credit (credit cards, store credit cards, lines of credit and overdrafts, loans and overdue debts that are in collections).
Canadian Credit Reporting Agencies
Two agencies in Canada that create credit reports: Equifax and TransUnion. All major banks, credit unions, credit card companies, finance companies and many other lenders and collectors report information to Equifax and TransUnion so that these agencies can create credit reports. Your information is reported according to specific rules and can only be shared with lenders and creditors who follow strict policies. A creditor can only access your credit report with your permission, and no one else is allowed to see your credit report without your permission.
Canadian Credit Scoring Model
Equifax and TransUnion generate credit scores on a scale that ranges from 300 to 900. The score is a ratio that indicates, over the next 12 – 24 months, what the likelihood is that you’ll be able to repay your debts. For example, if your score is 680, it means that 680 out of 900 people are likely to repay their debt. If your score is 500, the likelihood that you’ll repay your debt goes down. So, the higher your score, the better, but not at all costs. Keep in mind, that if your finances are tight right now and your score dips, it will recover as your financial situation recovers.
A lower score may prevent you from obtaining credit while a higher score makes it easier to obtain credit. Since a credit score also reflects an individual’s likelihood of repaying a debt, people with higher credit scores can sometimes obtain better interest rates, while people with low credit scores are sometimes charged higher interest rates because they are considered to be a higher risk.
Other Ways Credit Reports are Used
Credit reports can be used for more than just borrowing money. Some jobs require that your credit score be checked as a condition of employment. Some landlords may also request that tenants provide a copy of their credit report to rent a home or apartment. A landlord may view a renter’s credit report as a reflection of the tenant’s character and the likelihood that the renter will pay their rent on time.
Having a good credit score can definitely make life easier, but acquiring too much credit can be a problem if your income suddenly changes and you are no longer able to keep up with the payments.