Anyone who has ever used a credit card, taken out a loan, or purchased an item in installments spread out over time has a credit history and a corresponding score, but few know how that score is calculated.
Your credit score, or rating, is a three digit number ranging from 300 to 900 that rates how well you’ve managed credit in the past.
Your credit report is a summary of your credit history. Lenders send information about your accounts to the credit bureaus, also known as credit reporting agencies.
Credit reports include basic information about your history using credit. That includes what you owe, how long you’ve used credit, and how much credit you use within your limit. Credit reports also include whether you make your payments, including in some cases payments to service providers like internet and mobile phone providers.
Credit reporting agencies sell credit reports to potential lenders when you apply for a bank loan, a mortgage, or sometimes when you apply for a housing rental or a job, so that those lenders can check your score and determine how responsible you are with your credit.
Signals to lenders that you may be a risky lending proposition.
May be a sign that you are over-extending yourself.
Multiple applications for credit in a short timeframe can negatively affect your rating.
Having multiple types of credit, such as a credit card plus a car loan and a line of credit, will boost your credit score more than a single card will. But it’s important to make sure you use them responsibly as outlined above. Failing to make payments is far worse for your credit score than only having one type of credit.
You can—and you should—check your credit report at least once or twice a year for mistakes that can affect your score. You can dispute any genuine errors on your report for free. This could include incorrect personal information or false credit information, like when a payment you made on time is shown to be late. You should also check for credit accounts you didn't set up—a clear sign of identity theft.
There are two credit reporting agencies in Canada, Equifax Canada and TransUnion Canada. You should order your credit report from both agencies at least once a year, as they may have different information about you in their files. It is a good idea to request your report from one agency and then wait six months before you order from the other agency. By spacing them out, you have a better chance of detecting any issues sooner.