What’s the difference between a credit rating and credit score? What are “credit bureaus” in Canada, and how do they manage your credit file? What is the impact on your credit score if your account is assigned to a collection agency?
These are very important questions, attached to big consequences. Yet alarmingly few Canadians can answer them correctly.
Your credit score can be the difference between qualifying for a mortgage or not. A poor credit history can make it impossible or expensive to get a car loan or a credit card. It can even affect your ability to rent housing or get a job. So your credit report and credit score are significant factors in how you will live and enjoy your life.
Consumer Credit Bureaus in Canada
Let’s start with the keepers of this information, the credit bureaus. In Canada, there are two major agencies that deal with consumer credit: Equifax and TransUnion. The purpose of these credit bureaus is to provide individual credit information and monitoring, mostly for the benefit of lenders like banks, auto financing providers and other financial institutions.
Your credit report and credit score are significant factors in how you will live and enjoy your life.
In short, a credit bureau’s main job is to observe how you and I manage borrowing, and to translate our credit history into measurable and relatively consistent metrics, so any lender can quickly assess our risk.
It’s a numbers game, and from the lender’s point of view it is very important due diligence: even a minor drop in our credit score signals an increased statistical likelihood we will default on a new loan.
In Canada, the credit bureaus operate in similar fashions, yet they have slightly different ways of handling and reporting data. Credit reporting agencies are regulated by federal and provincial laws, and work for their members – not for consumers. Those members include banks, finance companies, credit card companies, auto leasing companies, credit card companies and retailers, as well as member collection agencies like MetCredit. To understand how credit bureau reporting helps collection agencies do their work, read this article.
Credit grantors and reporting collection agencies keep credit bureau information accurate by submitting regular reports of credit and payment activities. (At MetCredit we also report commercial accounts to Dun & Bradstreet as well as three specialized regional credit reporting agencies.) Each credit bureau in Canada manages its own database, and there can be significant variances from one to another.
See a sample credit report or a sample credit score.
Understanding Your Credit Score
Your credit score is a number between 300 and 900, generated by running a mathematical formula on the information within your credit report. In Canada, Equifax and TransUnion independently track your Credit Score, sometimes called your Beacon or FICO score. According to FICO, credit bureaus use the following matrix:
- 35% Payment History
Includes your track record for credit card payments and installment loans as well as adverse items (bankruptcies, collection agency reports, liens, judgments, etc.)
- 30% Debt Burden
The total you owe, including your credit card debt-to-limit ratio and proportion of debt still owing
- 15% Credit History Length
the time since each of your accounts were opened. Longer is better.
- 10% Types of Credit
Your mix of available credit (i.e. installment, revolving, consumer finance, mortgage) and your ability to manage different kinds)
- 10% Recent Searches
These are the bank “hits”, or hard credit inquiries that occur when you apply for a loan or credit card, and the time since the most recent one(s)
Monitoring Your Credit Score
All of us should keep an eye on our credit report, to track how we are doing and as vigilance against any attempted identity theft. Every Canadian is entitled to a free copy of his or her credit report (not credit score) from each credit bureau, once every 12 months – you can stagger them six months apart. This free credit report is called a “credit file disclosure” by Equifax and a “consumer disclosure” by TransUnion. Detailed information is available from the Financial Consumer Agency of Canada. Ordering your own credit report has no effect on your credit score.
How Long Does Information Stay on Your Credit Report?
People often ask how long various events remain on their credit report. The answer: it depends. Some kinds of information is kept longer than others:
- Inquiries from Lenders:
At least 3 years
- Credit Counseling, Proposals to Creditors, Orderly Payment of Debt (OPD):
3 years from settlement
- Collection Agency Reports:
- Judgments, foreclosures, garnishments and secured loans:
6 years from date filed
- First-time bankruptcies:
6-7 years from date of discharge
As you can see, most kinds of information continue to impact your credit score for six years. If you have a balance with a Canadian collection agency, you need to take care of it. Remember, a paid debt looks much better to any lender than an unpaid one.
Insider Tip: At MetCredit we have a policy of holding off on credit reporting for up to 30 days in the vast majority of cases, to give the debtor an opportunity to make good and avoid credit score repercussions. Although not all collection agencies do this and there are no guarantees, it can prove highly worthwhile to pay off collection agency debt immediately.
Most kinds of information continue to impact your credit bureau score for six years.
First-time bankruptcies stay on your credit file for six years in all provinces and territories except Ontario, Quebec, New Brunswick, P.E.I. and Newfoundland and Labrador, where it is seven years. Any subsequent bankruptcies stay on your record for 14 years from the date of discharge.
Court judgments follow the same rules as bankruptcies, except in P.E.I. where judgments remain on your record for 10 years. Small province, big wait!
6 Tips for a Winning Credit Score
1. Monitor your credit report. Subscribe to a credit monitoring service with Equifax or TransUnion or request regular free updates.
2. Establish multiple trade lines (a credit card plus a Line of Credit (LOC), for example) on at least $2,000 each.
3. Don’t close out old accounts. Try to use them all from time to time and pay them off promptly.
4. Don’t wait until the due date to make your payments. Pay a day or two early, or automate payments to avoid mishaps that will harm your credit score.
5. Keep your balance low on your credit cards and lines of credit. Less than 65% is a good benchmark.
6. Never let your accounts go to collections. Pay cell phone bills, auto leases, utilities and parking tickets by the due date, every time. Treat payment punctuality like your livelihood depends on it, because it does. If a collection agency calls, pay the debt as quickly as possible.
A strong credit score is an asset you build over time, and that can be rebuilt through good credit behaviour and habits. Your credit record is part of your identity, and will be with you all your life.
If you have slipped up, or if there is an error in your file, it is your own responsibility to fix things. Be informed about your credit report and how the credit bureaus of Canada work, and you’ll put yourself in a better position than most Canadians.
And if you have business debt to collect, be sure to download my 10 Debt Collection Pro Tips, the quick-reference document that has helped hundreds of business owners to collect more quickly and avoid bad debt!