Whether you want it to or not, your credit history contains a paper trail that follows you everywhere you go. Each time you pay a bill, take out a loan, or open a card or account, your actions contribute to your credit report. And, each time you miss one of those payments, default on a loan, or max out an account, these actions are traceable—and might actually be harming your overall credit score.
A credit score is a number (in Canada, scores range from 300 to 900) that helps determine a person’s creditworthiness. Credit card companies, banks, landlords, and other lenders will use this score to determine the risk factor when loaning you money, renting you a property, or deciding on the amount of credit to give you.
Your credit score is calculated using a formula based on your credit report. These reports are created by credit bureaus—the main two in Canada are Equifax and TransUnion—who collect, store, and share information about how you use credit. Your credit score will change over time with your actions and assets.
Simply put, you'll gain points for using your credit responsibly and lose points if you’re having trouble managing your credit. Many factors can negatively affect your credit score including:
Regularly missing or behind on payments
Reaching or going over your credit limit
Debts sent to a collection agency
The amount of outstanding debts
Many Canadians don’t even realize their credit score has been negatively affected as it can happen slowly and quietly over time. Although the impact may not be obvious right away, it can seriously affect you when trying to apply for a mortgage, lease a car, rent an apartment, or take out a loan.
Each lender has their own minimum credit score required, so if your credit score is low enough, you might not be approved. However, if your credit history is good enough, you may be able to get a lower interest rate on loans, which can save you a lot of money over time.
Credit reports are also important when looking for signs of identity theft or fraud. At least once a year, you should check to make sure someone has not tried to open credit cards or other loans in your name.
Dealing with your credit score is not complicated, but it can be confusing. It’s important you speak with a credit counsellor if you’re concerned about fixing your current situation or unsure of the next steps to take.