153 – Understanding Credit Scores and Reports

Wayne Kay 00:04
Understanding your credit score. That’s our topic today on the Debt Matters podcast where we help Canadians find solutions to their debt with Licensed Insolvency Trustees from across Canada.

I’m Wayne Kay. And coming up on the show today, we’re going to talk about what is a credit report? What is a credit score? Why is it important to always review your credit report? How is it calculated and what can you do to improve your credit score if it is bad and what does bad mean?

To tell us about this and more of my guests today, Brenda Wood from Allan Marshall & Associates Licensed Insolvency Trustee from Dartmouth, Nova Scotia. Hey there, Brenda.

Brenda Wood 00:45
Hi, Wayne. How are you today?

Wayne Kay 00:46
I’m great. Thanks very much for being on the show.

Brenda Wood 00:49
Well, thank you for having me.

Wayne Kay 00:50
I’m going to start off because you’re new to this – tell us about your passion for helping others. How long have you been doing this?

Brenda Wood 00:59
Well, I’ve been in the business now for a little over 25 years. And so I’ve enjoyed helping Nova Scotians find debt relief and be able to manage their debt a little bit better, teach them about some financial management going forward, like budgeting and, and things along those lines. And I’ve always enjoyed helping people with their, with managing those things.

Wayne Kay 01:22
Wow, 25 years. Okay. You’ve seen a few things and nothing is going to surprise you when it comes to helping out people who are in a situation. So for this show, I really wanted to really understand credit scores and reports and what it means and why it is important.

First off, I have to say that I heard, and I don’t know, this is probably false because things have changed. But I heard that by checking your credit score, it can make your credit score go down. Is there any truth to that?

Brenda Wood 01:54
There is not. So what people think is that when they check their credit report, well, that’s going to be a hit on my credit report,  so that’s going to impact what my score looks like.

The truth is that there are credit hits that are what we call soft credit hits and credit hits that are what we call hard credit hits. A hard credit hit is you go to the bank and you’re asking for a credit card and they do a credit check on you with your permission. That’s what we call a hard credit hit. So that’s going to show up on your credit report. And if you have a whole pile of those, that could impact your score.

But checking your own credit report doesn’t have an impact on it. That’s called a soft credit hit. And you can check it whenever you would like. And indeed, you should check it at least once a year.

Wayne Kay 02:37
Okay, we’re going to talk more about that. But in that explanation, you used two different terms. One of them was a report and one was a score. Can, what is the difference between a credit report and a credit score?

Brenda Wood 02:50
That’s a really great question because a lot of people don’t know the difference. A credit report is a summary of your credit history. So the first time you went and borrowed money. If you’ve ever used a credit card or taken out a loan, then a credit report would have been started for you.

It’s a credit history that every 30 or 90 days, depending on the lender, they’re gonna send information to the credit bureau about how you’ve been at repaying your credit. That’s what a credit report is.

The report is broken down into several sections. There’s a section on personal information, who you are, where you work, how long you’ve worked in one place, how long you’ve lived in one place, things like that. Previous address, previous employers, all that personal information will show up there, depending on what information you’ve given to your creditors who have reported that to the credit bureau.

There’s also a credit inquiry section. So back to your question about if you do a credit check on yourself, is it going to be a problem? Well, that’s where the credit checks show up is in the credit history, the credit inquiries part. Then each individual creditor has accounts information, and that’s going to show up on the credit report. Each creditor is going to have their own paragraph about how you’ve been at repaying your credit.

Also anything that’s part of the public record is also going to show up on that credit report. So if there’s judgments or Bankruptcies or Proposals, those will show up in that part of the credit report. So that’s what a credit report is as opposed to a credit score.

A credit score is actually an overall picture of your financial health. It is a way of reporting in a number what your financial health is, and it helps your lender determine how much of a credit risk you might be to them.

It ranks from number 300 to the number 900. And the lower you are on that, the more of a credit risk you might be to the lender. And the higher you are, the less of a credit risk the lenders see you as being. That’s the difference between a credit report and a credit score.

Wayne Kay 04:53
Okay. So when we look up our credits, for the most part, do we only see the score or do we have full access to both? Do we get to see the reports as well?

Brenda Wood 05:05
Typically you won’t see a score necessarily. You’re probably going to see what’s called a credit rating. So that’s the other thing to know. There’s a credit report, there’s a credit score, and then there’s a credit rating. A credit rating is how each individual creditor rates you. When you look at your credit report, you’ll see each individual creditor and then you’re going to see a number and a letter beside that creditor.

Those numbers and letters mean things. For example, if you had a credit card, then you would see the letter R besides that credit card. So that indicates that it’s revolving credit. You borrow on your limit on an ongoing basis, for example, Visa, Mastercard, some kind of a credit card, and then there’s going to be a number beside that.

You might have heard people say before, oh, I have an excellent credit rating because I have an R1. That means they had a revolving credit card and they were rated as a1, meaning they’ve made their payments on time and they’re up to date. But just because you have a great credit rating from each individual creditor doesn’t mean that’s your score.

Your overall picture of your financial health, that number that runs from 300 to 900. 900 is really good because you could have paid all of your creditors on time. So they’re reporting that you paid them on time and you’re up to date, but maybe you’re really over financed or you have too much credit and that’s going to bring your score down. So it’s important for people to understand the difference between what’s a credit rating and what’s a credit score.

Wayne Kay 06:43
So when you say having too much credit, would that be okay? So you’re only using, let’s, let’s say $1,000 on your credit card and you have a $10,000 limit. And they say, oh, we can increase this again. So it goes up to $12,000. But you only ever use a thousand – does that mean too much available credit? Is that bad?

Brenda Wood 07:08
Not necessarily. I think they’re looking at, are you overextended?

Wayne Kay 07:13
Oh, are you using too much credit?

Brenda Wood 07:15
Right.

Wayne Kay 07:17
Okay.

Brenda Wood 07:18
You could have a couple different credit cards, and if you’re managing those credit cards well and you’re paying them off at the end of every month or paying your minimum, and you only have small balances owing, you’re probably doing okay.

But if you have a couple or three different credit cards and they’re all at their max all the time, then you could be doing a great job with making your minimum payments. But you’re still overextended because you’ve got too high balances on those credit cards that you have.

Wayne Kay 07:43
Okay. Thank you for clarifying. So where do you go to check this information out – your credit scores?

Brenda Wood 07:50
That’s where you go, to the credit bureau. There are two credit bureaus in Canada, two major reporting credit bureaus. One of them is Equifax and the other is TransUnion.

You’ve probably heard of a couple other different places that people tend to look at their credit report, and that’s Borrowell and Credit Karma. Those are individual companies that will give you a snapshot of what your credit report looks like, but it’s not the actual credit report.

Once a year, we always suggest that people have a look at their actual credit report from Equifax and TransUnion, because some lenders report to Equifax and some lenders report to TransUnion. So sometimes you’re going to find a difference between what your Equifax credit report looks like and what your transunion credit report looks like.

Wayne Kay 08:38
Okay. And it’s important to keep up to date with this. Why? Because I’m terrible at this. I didn’t look forever. And even now, it’s not something I keep up with.

Brenda Wood 08:49
Most Canadians don’t. And the reason why it’s important to look at it at least once a year is because, and I’ve got a statistic for you, 80% of all files have errors on them.

It’s an incredible, incredibly high statistic. And that could be anything from a previous address that you never lived at, a previous employer that you never worked for, or it could be something as major as – there’s a Home Depot card showing up on my credit report, and I’ve never used a Home Depot card in my life.

Those are the kinds of things that you can find as errors on that credit report when you’re checking it out at least once a year. And those errors need to be reported to the credit bureaus so that they can investigate it and they can fix any errors that there might be on your credit report. That could be causing your score to be much lower than it needs to be, when there’s errors on that report.

Wayne Kay 09:46

I think I have this through my online banking where I can go check my credit score. Would they be using either of those?

Brenda Wood 09:55
Yes, they should be using Equifax or TransUnion to give you that number.

Wayne Kay 09:59
It’s funny that we’re talking about this because this weekend I was hanging out with my son and he asked a very interesting question. He said, why is my credit score up and then it will drop down and now it’s back up again. And I didn’t really do anything. He was at whatever, 830 and it went down to 790 and then it went back to 830 again and it was all within, I think, a month.

Brenda Wood 10:29
Yes, that can happen quite a bit, actually. Everything that you do can impact that score. And it could be, as you said, a couple of points. It could be more than a couple of points.

So if you pay off a credit card, that’s going to impact your score. If you then use the credit card and max it out again very quickly, that could impact your score. All kinds of different things that impact that score. Some of those things are, and I can give you the weighting your credit score is calculated.

10% of that score is the type of credit you have. Lenders like to see things like a credit card, a car loan, some other kind of a loan, maybe a line of credit, different kinds of varieties of credit will have an impact on what that score looks like. And so the weighting in that score is about 10%. So I suppose if you went out and got something new, a new credit facility, whatever that might be, that could impact your score.

10% of that credit score is calculated by the number of queries on your credit report. So perhaps your son went out and inquired about getting three different credit cards. Well, that’s going to bring his score down slightly, because he looked for three different credit facilities in a short period of time. One credit inquiry here and there is probably not going to impact your score too greatly, but a whole bunch of them in a row is going to have an impact on your score. And that’s a 10% weighting.

And there’s other ones there as well that could have an impact on what that score might look like from time to time. So I often tell people, don’t worry too much about the score. If your score is really low or just kind of fair, there are things you can do to work on it. But if you’ve got a pretty good score and it’s fluctuating from time to time, the more important thing is to look at that credit report, make sure it’s up to date and make sure there aren’t any errors on there.

One of the reasons why, we’ll go back to that for a second, and one of the reasons why I suggest people do that, in addition to making sure that it’s correct and up to date and there aren’t errors, is that sometimes you can catch things like identity theft on your credit report.

I can give you an example. A number of years ago, a friend of mine had an issue where there was an employer that showed up on her credit report that she had never worked at. And in fact it was an employer out of Ontario and she’d never lived anywhere but Nova Scotia. So she started doing some investigating and found a few other things on her credit report that were not hers. And it came to find out that her social insurance number had been somehow hacked by somebody and they had been opening credit on her name.

So she had to go and get that all fixed up. That’s a really good indicator on your credit report is to, is there something going on that maybe you need to look at a little deeper?

Wayne Kay 13:16
Wow. Okay, that’s scary enough right there for me to start keeping up to date with what’s going on with mine. Now, when they do the calculations of your credit score, is it based on that, the 10% that you were talking about and they had it all together, is that how they come up with the number?

Brenda Wood 13:33
That’s right. So it’s 10% the credit you already have, 10% the number of queries. 15% is how long have you had the credit. The longer your credit history, the better. 30% is your outstanding debt. So how much available credit are you using? So the less you use the better, but you want to be using some because you’re showing them that you can use it and pay it back. And then 35% is your payment history. So do you have late payments? Do you have a bankruptcy? Do you have collections? Do something that’s gone to judgment.

There’s really heavy weighting on how you’ve been repaying your credit at that 35%. And all those numbers go into this wild and wonderful formula that, that spit out this number that ranges you from 300 to 900. 300 is poor and 900 is excellent. And you’re not going to see many people at 300 or many people at 900, but you’re probably going to see people anywhere in between.

Wayne Kay 14:29
Okay. And what’s the number we need to be concerned with? I know you said don’t worry about the number, but I’m sorry, I have to worry about the number. I’m stressing over the number.

Brenda Wood 14:37
Everybody does.

Wayne Kay 14:38
If it’s under 500 or if it’s under 600, we need to do something.

Brenda Wood 14:44
So a good credit rating is anywhere from 660 and up. So 660 to about 724 is good. 725 to 759 is very good. And then 760 and above is considered excellent. So if you are below that, then you want to look at what can you do to help improve that credit score.

Wayne Kay 15:04
Can you tell us what we can do to help improve that credit score in case somebody’s under that 660?

Brenda Wood 15:09
I sure can. And I’m sure you can probably guess because we’ve talked about it already, and that goes back to reviewing your credit report. One of the number one ways that you can help improve your score, because, again, 80% of Canadians have an error in their credit report is make sure it’s accurate and it’s up to date and there’s nothing that needs to be corrected.

And then on top of that, you want to look at making sure you pay your bills on time. So payment history is the largest portion of your credit score. That’s at 35%. So you want to make sure that you pay those bills on time. If your visa bill is due on the 13th of each month, make sure you pay it in advance of that. Make sure you pay it four or five days ahead of that.

If you pay it online or you pay it through some other means and it takes a while for it to actually update through the computer system, it’s paid on time. Because if you’re past that, that due date on the 13th, that could impact how they rate you. That rating of one that the creditor gives you is based on you making your payments on time.

And if you’re behind a payment, then you’re going to get a rating of two, and that’s going to bring your score down. So there’s that. And then keeping your balances low. Don’t overextend yourself.

It’s okay to use it, just make sure that you don’t overextend yourself and you don’t have every credit facility that you have maxed out, because that’s certainly going to impact that score.

The other thing you can do is only apply for credit when you need it. You don’t need five credit cards. If you find that you are maxing out your credit cards and you need another credit card to use again because the other ones are maxed out, might be a good idea to have a chat with a Licensed Insolvency Trustee and talk about what your options are for dealing with the debt before you go out and apply for credit again because that’s going to have an impact on your score.

And a lot of people talk about, make sure you close those old accounts up. If you have a credit card or a loan that you’re not using anymore, especially with the credit cards, do you want to close that account out? And sometimes you don’t want to if you have a good history there.

The history is I had this credit card and I used it and I paid it off and I don’t use it anymore and it’s closed, it’s still giving you a history so that it shows up on the credit report as being a history that you’ve paid it and you’ve kept it. You’ve kept it at a good, at a good rate of pay and they’re paid off in full.

Wayne Kay 17:27
Okay. So that history stays around forever.

Brenda Wood 17:31
Stays around for a long time. Most things show up on the credit report for six or seven years from the date they last report on it.

Wayne Kay 17:39
Okay.

Brenda Wood 17:39
It depends on which province you’re in in Canada. So usually it’s six or seven years from the date of last reporting. And so, for example, with a credit card that you might have closed, it would still show up, even though you’ve closed it. It’s still going to show up on that credit report for a number of years because there’s a history of how you’ve been at repaying your credit. And that’s not necessarily a bad thing. Again, if you’ve done well with it, then it would be good credit history, and that’s going to help keep that score higher.

Wayne Kay 18:07
We covered a lot of information on the show today. I’m super happy you took the time to chat with us and be on the show. Any final thoughts you want to share regarding this topic?

Brenda Wood 18:18
No, I think the only final thought is that if you look at your credit report again, it goes back to keeping an eye on it once a year. Keep an eye on that credit report. If you’re seeing issues or you find that you’re getting overextended and, and you’re concerned because your credit report shows all this credit that you’re having an awfully hard time keeping up with. And you have a Licensed Insolvency Trustee, call and we can give you some more guidance on how to deal with it.

Wayne Kay 18:39
That’s amazing. Brenda, thank you very much for being on the show.

Brenda Wood 18:43
Thank you, Wayne.

Wayne Kay 18:44
Once again, my guest was Brenda Wood from Allan Marshall & Associates Licensed Insolvency Trustee. You can schedule a free consultation and find out more information through their website wecanhelp.ca.

And that is it for today’s Debt Matters podcast. Make sure you subscribe wherever you get your favorite podcast from. And of course, if you want more information, you can always check out debtmatters.ca. Thanks for listening.