A credit report for each buyer going on title is one of the three most important items a bank or mortgage broker checks to see if you are credit worthy and if they’re willing to give you a mortgage.
If you’ve never had credit, have no debt and have always paid cash for purchases, this is not a good thing in this instance. Lenders want to look at your credit history to see how you’ve handled credit in the past.
If this is you, then you should immediately go and apply for a credit card and use it monthly. Pay the balance off to zero if that makes you more comfortable. Doing this for a minimum of six months will establish a good credit record for you.
Most of us do have credit of some sort and therefore we have a credit file.
So what's in a credit report?
You may be surprised by the amount of personal financial data in your credit report. It contains information about every loan you've taken out in the last six years — whether you regularly pay on time, how much you owe, what your credit limit is on each account and a list of authorized credit grantors who have accessed your file.
Each of the accounts includes a notation that includes a letter and a number. The letter "R" refers to a revolving debt, while the letter "I" stands for an instalment account. The numbers go from 0 (too new to rate) to 9 (bad debt or placed for collection or bankruptcy.) For a revolving account, an R1 rating is the notation to have. That means you pay your bills within 30 days, or "as agreed."
Any mortgage lender that's thinking of granting you a mortgage will want to get a copy of your credit report.
Needless to say, they want to see lots of "Paid as agreed" notations in your file. And your credit report has a long history. Credit information (good and bad) remains on file for at least six years.
What's a credit score? And why is it so important?
A credit rating or score (also called a Beacon or a FICO score) is not part of a regular credit report. Basically, it's a mathematical formula that translates the data in the credit report into a three-digit number that lenders use to make credit decisions.
Factors in determining a credit score:
- Payment history. A good record of on-time payments will help boost your credit score.
- Outstanding debt. Balances above 50 per cent of your credit limits will harm your credit. Ideally, aim for balances under 30 per cent.
- Credit account history. An established credit history makes you a less risky borrower. Think twice before closing old accounts before a loan application.
- Recent inquiries. When a lender or business checks your credit, it causes a hard inquiry to your credit file. Apply for new credit in moderation.
Credit score numbers go from 300 to 900. The higher the number, the better. For example, a number of 750 to 799 is shared by 27 per cent of the population.
Statistics show that only two per cent of the borrowers in this category will default on a loan or go bankrupt in the next two years. That means that anyone with this score is very likely to be approved for the mortgage they've applied for.
What are the cutoff points? TransUnion says someone with a credit score below 650 may have trouble receiving new credit.
Some mortgage lenders will want to see a minimum score of 680 to get the best interest rate.
The exact formula bureaus use to calculate credit scores is secret. Paying bills on time is clearly the key factor. But because lenders don't make any money off you if you pay your bills in full each month, people who carry a balance month-to-month (but who pay their minimum monthly balances on time) can be given a higher score than people who pay their amount due in full.
This isn't too surprising when you realize that credit bureaus are primarily funded by banks, lenders, and businesses, not by consumers.
How can I get a copy of my credit report and credit score?
You can ask for a free copy of your credit file by mail. There are two national credit bureaus in Canada: Equifax Canada and TransUnion Canada. You should check with both bureaus.
Complete details on how to order credit reports are available online.
Basically, you have to send in photocopies of two pieces of identification, along with some basic background information. The reports will come back in two to three weeks.
Credit scores run from 300 to 900. The higher the number, the greater the likelihood a request for credit will be approved.
The "free-report-by-mail" links are not prominently displayed — the credit bureaus are anxious to sell you instant access to your report and credit score online.
For TransUnion, the instructions to get a free credit report by mail are available here. For Equifax, the instructions are here.
To have a confidential review of your credit report, send me an email or text and we’ll set up a time to meet over a coffee.
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