The Loans Canada team sits down with Gary Schwartz of the Canadian Lenders Association to talk about open banking.
How Your Payment History Affects Your Credit Score
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If you’ve never looked up your credit report or score, we can’t recommend enough that you do. It’s important for all Canadians to understand how their financial state affects not only their ability to obtain credit but how it can influence other areas of their lives as well. Did you know that landlords and employers can view your credit report and use the information to decide whether to rent their property to you or hire you? And that checking your report regularly, for errors or fraudulent activity, can also be an effective way to prevent identity theft.
Want to know how to dispute an error on your credit report? Click here.
How Can I See My Credit History?
There are two main Consumer Reporting Agencies (CRAs, but not to be confused with the Canada Revenue Agency) or Credit Bureaus in Canada. These agencies keep track of personal information, past and present credit accounts, and the payment history of Canadians who have any type of credit.
You can request your personal credit report, for free, from the official companies, Equifax or TransUnion. If you don’t want to wait for snail mail, you can access your information instantly, online, for a fee.
To learn how to get a free copy of your credit report, read this.
CRAs use the information in your credit report to assign you a credit score. Your score is used to determine your creditworthiness, based on the credit you have and how you have used it in the past. Credit scores range from 300-900, with 300 being considered poor and 900 being excellent. Equifax and TransUnion use slightly different calculations, so it’s wise to check your score with each agency annually. It’s also important to note that most lenders and creditors only report to one of the two bureaus, which is why you’ll have two slightly different scores.
Factors That Can Affect Your Credit Score
CRAs consider five main factors when calculating your credit score and they are weighted as follows:
Payment History (35%)
They will be looking at how often you pay your bills on time and the frequency of late or missed payments. If you have accounts that have gone to collections or have filed a consumer proposal or bankruptcy, your credit score will be reduced accordingly.
Current Debts (30%)
The higher your debt is, the greater borrowing risk you represent to lenders. Keeping your debt under 35% of your total credit limit will help keep your score healthy.
Account History (15%)
The longer your accounts have been open, the better, especially if they are in good standing.
Number of Inquiries (10%)
The number of times you apply for new credit can affect your credit score. Those made within the previous year are considered. Several hard inquiries in a row can impact your score in a negative way.
Types of Accounts (10%)
The types of credit accounts are factored into your credit score. If you have a mix of credit types, it highlights your ability to manage various kinds of credit.
How Your Payment History Affects Your Credit Score
Your payment history is the most influential factor when determining your credit score. Lenders want to see that you will pay back the money they lend to you. Those viewing your credit score may use the 3-digit number as a determining factor in your credit-worthiness, but they may also consider the ratings they see on your credit report. If you have multiple missed or overdue payments on your report, you may be unable to borrow money and could be passed over for employment, insurance or property rental.
Read this to learn the differences between a credit score and a credit rating.
On the other hand, if you pay on-time, consistently, your credit score will be higher.
Understanding the Codes on Your Credit Report
Each account on your report will display a letter and a number. The letter tells you the type of account:
- Installment Accounts (I) – You make regular, fixed payments until the loan is paid in full. Examples: car loans and student loans.
- Open Status Accounts (O) – Balances are paid at the end of each billing cycle. Payments may be different each month, based on contract and usage.
Examples: charge card where the balance needs to be paid in full each month and cell phone bills.
- Revolving Accounts (R) – You can borrow money, as needed, up to a set limit. Payments vary, depending on your balance. You may pay a minimum payment and carry a balance. Examples: Credit cards, lines of credit.
- Mortgage Accounts (M) – Home mortgages and home equity lines of credit may or may not be reported.
Each account is also assigned a number between 0 and 9, rating how well you are managing payments on that account.
- 0 is used for new accounts
- 1 means you always pay within 30 days
- 2 means you have paid 31-59 days late
- 3 means you have paid 60-89 days late
- 4 means you have paid 90-119 days late
- 5 means you have paid more than 120 days late
- 6 is not currently used
- 7 means you are working on consolidation, consumer proposal or debt management program
- 8 means repossession
- 9 means you are in collections or have declared bankruptcy
When It Comes to Payment History, Which Accounts Count?
Installment, open credit, and revolving credit will all be considered when calculating your credit score, so you’ll want to keep on top of payments for credit cards, personal loans, car loans, and lines of credit. If student loans have been deferred, this won’t be an issue but when it comes time to make payments, make them consistently.
Want to know what happens if you stop paying your credit card bills? Look here.
Mortgage accounts and payment history might show up on your credit report, but not always. Canada’s big five banks and some credit unions report to the credit bureaus but might only send data to one or the other (TransUnion or Equifax). Other mortgages, with smaller companies and private lenders, aren’t likely to show up on your report unless you are delinquent. Check your report to see if your mortgage account is there.
If you are renting, those payments won’t be reported to the CRAs at all.
Things that make you go hmmm . . . Planning to eliminate your debt? If your mortgage account does show up on your report, and you pay off the balance, you can actually lose points on your credit score because your housing situation is seen as unknown.
Trying to get a mortgage? Read this to learn the minimum credit score you need to be approved.
What if My Payment History is Bad?
Since your payment history is so important, payment issues can definitely cause problems. Unfortunately, a late payment can remain on your account for up to seven years. The good news is that late payments, under 30 days, have no effect on your credit score, and your most recent payment history will carry the most weight with creditors.
Lenders, employers, landlords, and insurance companies sometimes look at the larger picture before they make decisions and you can make have notes added to your credit report to explain difficult circumstances.
Thinking of becoming a landlord? Make sure to ask yourself these 5 questions before you do.
You can also improve your financial situation over time. With good budgeting and persistence, you can lower your balances. Setting up automatic payments and notifications can ensure you make all of your payments on time.
If you do have bills in collection, pay them off and ask the company to remove the record from your credit report.
How to Improve Your Credit Score When Payment History Has Hurt It
If you have had very little credit or your credit history shows problems with payments, there are ways you can build or rebuild a positive payment history:
- Private Lenders – While it may be tough to get a loan through a traditional bank, it is often easier to obtain a personal loan or a mortgage through a private lender.
- Secured Credit Card – You will provide a security deposit before using a secured card, thereby reducing the risk for the lender. You’ll have the opportunity to prove that you can use credit responsibly and your payment history will be reported to the credit bureau.
- Credit Rehabilitation Savings Program – Your payments will be reported to the CRAs and you will be able to access funds as equity builds, all while improving your credit score.
For more ways of improving your credit, read this.
Using credit regularly and making punctual payments will boost your credit score over time. Call us today to discuss ways we can help you use credit to fix the payment history issues lowering your credit score.
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