Ian SMITH: Seven Things You Should Know About Credit Reports

Are you in the market for a house, a car or new clothing and do not have the cash to pay for those things? Most likely, you are planning to pay via a form of credit, whether it be a loan, credit card or a mortgage. As a result of obtaining credit for your purchase, you will create a record of borrowing, which other lenders can consult in the future to evaluate your capacity to repay debts and the level of risk they are taking by lending you money. Typically referred to as a “credit report”, this record is often forgotten when consumers attempt to get an increase on a line of credit at their banks.
To better understand credit reports and how they play a role in personal finance, here are 7 things to be informed about before using a source of credit.
1.    Why Are Credit Reports Important?
Credit reports are important due to their ability to inform lenders about one’s past use of credit and how it’s handled – managed. If a lender judges that you have difficulties managing debt over a given amount of time, you can be restricted access to a certain amount of credit, or be refused the total amount that you would like to borrow.

2.    What Is In A Credit Report?
A credit report can be comprised of several sections, which include basic details such as identifying information (i.e., home address and place of employment), credit and loan information. The report provides data on your balance, credit limit, account type, account status and payment history. For individuals who have gone through some financial difficulties, a credit report will reveal bankruptcies, court judgments, debts assigned to collection agencies, repossessions, etc.

3.    Where Can I Get My Credit Report?
In Canada, there are two main credit reporting agencies:  Equifax Canada and TransUnion Canada. To obtain your free report, you will be asked to send in photocopies of two pieces of identification, along with some basic background information to have the report mailed to you in two to three weeks. If you wish to get an electronic copy of the report, visit each agency’s website and complete the necessary forms.  There is a fee attached to getting your credit report via the internet.

4.    How Do I Read My Credit Report?
Once you have received your report, you will see a series of numbers that represent your credit history, along with letters that represent the type of credit used; all are indications of good or bad credit scores.
Agencies use a scale of 1 to 9 to evaluate your credit history where a rating of “1” signifies the ability to pay bills within 30 days of the due date. A rating of “9” means that you never pay your bills. The letter that appears before the number will either be an “I”, “O”, or a “R”.  An “I” means that you were given credit on an installment basis, such as for a car loan, where you borrowed money once and repaid it in fixed amounts (on a regular basis) for a specific period of time until the loan is paid off.
An “O” indicates that you were given open credit such as a line of credit, where you borrow money, as needed, up to a certain limit and the total balance is due at the end of each period.
An “R” means you have “revolving” credit, where you make regular payments in varying amounts depending on the balance of your account and you can then borrow more money up to your credit limit. Credit cards are a good example of “revolving” credit. Receiving a score of “R9” will tell credit card companies that you are a risky candidate to have another card or obtain an increase of a line of credit.

5.    How Do I Improve My Credit Score?
Since a poor credit score will prevent you from getting credit in the future, you should attempt to improve the score as soon as possible.  To do so, consider paying your bills on time and in full, do not go over the credit limit, reduce the number of credit applications you make and establish a credit history by using a credit card and paying back the money on time.

6.    How Do I Report An Error In My Credit Report?
If you spot an error in your report, be sure to report it to the credit agency in a letter and tell them you think there is an error.

7.    When Should I Access My Credit Report?
If you are planning to apply for new source of credit or ask for an increase in your line of credit for future use, you should obtain a credit report.   Getting the report in a timely fashion will allow you to improve your rating before a financial service provider will have access to the report when they decide on whether or not to grant you additional credit.
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