The Comprehensive Guide To Your Credit File
Your credit rating is imperative. It’s your financial report card and your lifeline to (responsible) debt. In the industry I work in, I see so many people who mismanage their credit, either because of financial hardship or due to lack of knowledge.
When you use credit, you are borrowing money which you promise to pay back within a specified amount of time. Your credit report is what prospective lenders see when they look to extend credit to you. Your credit report is provided by consumer reporting agencies called Credit Bureaus. The two largest Credit Bureaus in Canada are Equifax and Transunion, and in the United States, there are three: Equifax, Transunion, and Experian. Your credit score is calculated using an evaluation system, and here is how it breaks down:
Payment History – 35%
Your payment history is the most important factor in your credit score. Your payment history reflects the payments you make on all of your consumer debts. Creditors report to the Credit Bureaus every time you make a payment on your credit cards, lines of credit, car loan, personal loan, student loan, cell phone (yes it reports), and any other debt you may have. Mortgage payments are not reflected on your credit report, but almost everything else is. So every time you decide you are going to pay your Rogers bill late, guess what? It shows up on your credit file.
Utilization – 30%
When you apply for credit, a lender will look at how much credit you have available to you, and how much of that available credit you are using. You may think you can handle another monthly payment, but your credit file may say otherwise. This is achieved by a simple calculation we call ATP (ability to pay). Believe it or not, having a bunch of available credit helps your credit score. When you max out all your credit cards and other revolving accounts, you bring your credit score way down. Ideally, you should not carry a balance on your credit cards, but if you must for some reason, never use more than 75% of your available credit.
Inquiries – 10%
When you apply for credit at multiple lenders in a short amount of time, it can signal financial difficulty, and it looks less than favorable on your credit report. Creditors will fail perspective clients solely based on the fact they have had too many inquiries on their credit file. When you apply for credit, you give the creditor permission to perform a hard pull on your credit file – too many of these in a short amount of time will lower your score tremendously.
Types of Credit Used – 10%
Different types of credit show how your manage your money overall. Deferred interest or payment plans can demonstrate you are not able to save up for purchases ahead of time. Consolidation loans indicate you’ve had trouble repaying your debts in the past, etc.
How to get your free credit report
When you visit one of the credit bureau’s website, it isn’t very clear how to get your free credit report. Most of the links direct you to paid services which allow you to view your credit file and score for a one-time fee, or a monthly fee. This is how they make money off of you. If you don’t mind waiting about five days, you can get your credit file once a year through the mail, for free.
You need to fill out this PDF, provide two pieces of Government-issued ID, and an additional document which shows your address (utility bill, bank statement, etc.). You can also do all of this via an automated telephone service by calling this number – 1-800-465-7166.
You need to fill out this PDF, provide two pieces of Government-issued ID, and an additional document which shows your address. Like Equifax, you may also file the request on the telephone. 1-800-663-9980.
Remember, your credit score, and credit file are two completely different things. Ordering your credit file through the mail will not allow you to see your credit score – you will need to pay about $15 for that privilege.
Even if you are debt-free and make all your payments on time, you should still order your credit report once per year to check for inaccuracies. It is possible to correct (dispute) mistakes on your credit file; however this is a very slow process, and if you wait until the bank denies you your dream house, you may miss out. Check it once a year, and correct any mistakes before you seek credit – it’ll save you a ton of headaches.