All Canadians should understand how their credit can affect not only their ability to obtain loans and other credit products but how it can influence other areas of their lives as well. Did you know that landlords and employers can also check your credit and use the information to decide whether to rent their property to you or hire you?
Given the importance of your credit, it’s crucial to understand how it works and what can affect it. In particular, we’ll be looking at how your payment history can affect your credit scores.
What Are Credit Scores?
The credit bureaus use the information in your credit report to calculate your credit scores. Your scores are used by lenders, creditors, and other parties to determine your likelihood to repay debt or pay bills on time. Credit scores range from 300-900, with scores below 560 being considered poor and scores above 759 being excellent.
Do note, everyone has multiple credit scores in Canada. This is because each credit score provider has its own credit scoring model, so your score at Equifax and TransUnion may be different. Your credit scores also may be different because not all lenders and creditors report to both credit bureaus. As such, one credit bureau may have more information on you than the other, this discrepancy can affect the calculation of your credit scores.
How Your Payment History Can Affect Your Credit Scores?
Your payment history is one of the most common and significant factors when calculating your credit scores. On average, your payment history will account for 35% of your credit score. Your payment history includes information about how often you pay your bills on time and the frequency of late or missed payments on all your credit accounts. This includes your credit cards, personal loans, car loans, student loans, lines of credit, and mortgages.
Your payment history also includes details about accounts that have gone to collections or if you’ve filed a consumer proposal or bankruptcy. All of these factors can affect your payment history and thus your credit scores.
Importance Of Your Payment History
Lenders want to see that you will pay back the money they lend to you. 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.
When It Comes to Payment History, Which Accounts Count?
Installment, open credit, and revolving credit will all be considered when calculating your credit scores, so you’ll want to keep on top of your 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.
Do Mortgage Payments Affect Payment History?
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.
Do Rent Payment Affect Payment History?
If you are renting, those payments won’t be reported to the credit bureaus at all. However, you can have your rent payments reported to the Equifax credit bureau if you use the Landlord Credit Bureau. They are a consumer reporting agency in Canada, that allows tenants to use their rent payments to help them build their payment history.
What Other Factors Can Affect Your Credit Scores
While each credit scoring model may vary, there are five factors that are commonly used when calculating your credit scores. Aside from your payment history, these are the other four factors:
- Debt-To-Credit Ratio (~30%) – Lenders generally like to see a debt-to-credit ratio of 30% or lower. The higher your debt is, the greater borrowing risk you represent to lenders.
- Credit 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 scores. Several hard inquiries in a row may impact your scores in a negative way and can signal financial distress to lenders.
- Public Records (~10%) – Public records include information such as bankruptcies, consumer proposals, lawsuits, liens and other derogatory remarks.
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, while the number ( between 0 and 9) rates how well you are managing payments on that account.
|Installment||(I)||Accounts that receive an “I” are installment-style accounts that are paid off in predetermined fixed amounts. For example, a car loan.|
|Open||(O)||Accounts that receive an “O” are open, meaning you have an open credit account. An example is a credit card bill that you pay at the end of the month.|
|Revolving||(R)||Accounts that receive an “R” are considered revolving credit because your payments change based on how much of your limit you borrow. A credit card may receive an “R”.|
|Mortgage||(M)||Depending on the credit bureau you pull your report from, your mortgage may or may not show up. If it does, it may be represented by an “M” or potentially an “I” for installment.|
|0||For new accounts|
|1||Means you always pay within 30 days|
|2||Means you have paid 31 to 59 days late|
|3||Means you have paid 60 to 89 days late|
|4||Means you have paid 90 to119 days late|
|5||Means you have paid more than 120 days late|
|6||This number is not assigned a value|
|7||Means you are working on a consolidation, consumer proposal or debt management program|
|9||Mean your account is in collections or bankruptcy|
What If My Payment History Is Bad?
Since your payment history is one of the important factors used to calculate your credit scores, payment issues may negatively affect your credit. Unfortunately, a late payment can remain on your account for up to seven years. The good news is that late payments, under 30 days, may have no effect on your credit score.
Lenders, employers, landlords, and insurance companies sometimes also look at your credit before they make decisions. If you have bad credit, you can have notes added to your credit report to explain difficult circumstances.
How To Improve Your Credit Scores?
If you are starting from scratch or your credit history shows problems with payments, there are ways you can build or rebuild a positive payment history. It’s important to understand that building a health payment history takes time, you won’t see improvements overnight.
- Secured Credit Card – If you can’t get approved for a traditional credit card, you can consider a secured credit card. They act similarly but you’ll need to provide a deposit and your credit limit will likely be smaller. You’ll have the opportunity to prove that you can use credit responsibly and your payment history will be reported to one or both credit bureaus, depending on the provider.
- Private Lenders – While it may be tough to get a loan through a traditional bank if you have no history of making timely payments, it is often easier to obtain a personal loan or a mortgage through a private lender.
- Budgeting – 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.
How To Check Your Credit?
There are two main credit bureaus (or consumer reporting agencies) in Canada; Equifax and TransUnion. You can check your credit with either credit bureaus or through third-party credit score providers.
Canadians can access their Consumer Disclosure; a report that includes all the information in your credit report (mandated by consumer reporting legislation), online for free once a month. You can also request a free copy of your Consumer Disclosure by mail, phone or by visiting a TransUnion office in-person.
However, do note that your TransUnion credit score is not included in the report. Only residents of Quebec can obtain it for free (if requested by mail or in-person) due to the Quebec Credit Assessment Agents Act (“CAAA” or “Act”). The rest of Canada can get unlimited access to their credit score when they subscribe to TransUnion’s credit monitoring service for $19.95 a month.
Equifax, on the other hand, provides all Canadians free access to their credit report and Equifax credit score. You simply need to create an account online or request a copy by mail.
There are also a number of third-party providers that offer free credit scores to Canadians.
Payment History FAQs
What is payment history?
How do my payments affect my credit scores?
How come I don’t have a credit score?
How do I know if my credit score is high enough?
Everyone’s credit scores react differently, nothing is guaranteed to help improve your credit. But over time, making timely payments can help build a healthier payment history. Overall, using credit responsibly and making punctual payments can help your credit scores over time.