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Keeping your credit clean is one of the most important things you can do to maintain a healthy financial profile. Not only will you have an easier time getting approved for credit cards and loans at the best rates, but prospective landlords and even employers can and do check your credit score. If you have made mistakes in the past, it could prevent you from getting a lease on an apartment or landing a new job.
In Canada, two credit bureaus, TransUnion and Equifax, collect data from lenders and give you a credit score. Your credit score is a three digit number between 300 and 900 that tells lenders how likely you are to repay your obligations. The higher the score, the more financially responsible you are, and will be able to get approved for better loans. Many people wonder why the two scores can be different if they are using accurate information.
If you check your credit scores, you will often notice you get a different result depending on which bureau is reporting the information. This is no cause for concern, it’s actually quite rare that they would both be the same. It does seem like something must be inaccurate for this to be the case, but let’s explore the differences between the two bureaus.
Each bureau uses a slightly different algorithm to calculate your score using the data that is reported to them by each lender. While the exact methods are proprietary, the bureaus are periodically updating their scoring metrics based on how credit consumers who fit different criteria are paying back their loans on time. The main thing to remember is that even if the precise methods may be unknown and change from time to time, the purpose of your score is to give lenders an idea of your creditworthiness. The same behaviors tend to influence your score in the same way on both models. Mainly, paying your bills on time and not overextending yourself with high credit card balances that signal you may be living above your means.
Not all lenders report all of their information to each bureau. One or more of your accounts may not be getting reported to one of the bureaus. Not all banks or other lenders are reporting all of their consumers’ loans to both bureaus.
Your score is a single snapshot of your financial health. Information is constantly being updated by the bureaus as the lenders report information. In addition, age of account is a major factor in calculating your score. Your score typically rises as accounts get older, so scores taken with the same information on different days will likely see different results.
TransUnion does make public some of the factors that go into the proprietary formula that is used to calculate scores. While the exact methods are secret, and change from time to time, TransUnion uses five main metrics to calculate a credit score.
The most important factor TransUnion uses in calculating a credit score is payment history. Each month every lender you have an account with reports to TransUnion whether or not you made the payment in time. After a 30 day grace period, you may receive a 30, 60, 90, or 120 day late payment on your report. Late payments, as with all negative entries, stay on your report for seven years. Late payments drastically reduce your credit score. Although the amount of your score is reduced over time, a late payment that is several years old can still have a serious negative impact on your score.
The second factor is the amount owed on your accounts. The more money you owe relative to either your credit limit or the original loan balance, the lower your credit score will tend to be. If you have a balance on your credit card of $1,000 your score will likely be lower if you have a $1,000 credit limit compared to someone who has a $2,000 limit.
The third factor used by TransUnion is the length of credit history. The credit bureau wants to see a very long history of a consumer paying their bills on time. If someone just gets their first credit card, even if they make the first payment on time, newer borrowers are seen as statistically more risky to banks, and will likely have a relatively low score.
The fourth factor used by TransUnion is types of credit. Borrowers who have several types of credit accounts in good standing will have higher scores than those who only have one. The different types of accounts are revolving accounts, such as credit cards, installment accounts, such as car or student loans, and mortgage accounts.
The fifth category is new loans. TransUnion may give a borrower a lower score when a new credit card or loan account is opened. After the account shows several months of on-time payments and is in good standing, the score will rise again.
Similar to TransUnion, the main factor Equifax uses is payment history as well. You simply cannot have a high credit score if you do not pay your bills on time.
The second most important factor is used versus available credit. It is similar to the amounts owed that is used by TransUnion. The closer to your credit limits or original loan balances, the lower the score will be.
Also, same as TransUnion, the third factor is the length of credit history. The longer you have established a history of paying your bills on time, the higher your credit score will be.
The fourth most important factor in your Equifax score is public records. If any of your debts have been sold to collection agencies or have ended up in court, that will have a negative effect on your score.
Finally, the last factor that Equifax uses is the number of inquiries. Every time a potential lender accesses your credit report when you apply for a new loan, a hard inquiry will be added to your report. Every hard inquiry may lower your score for a period of up to one year.
Different lenders may use one or both credit bureaus for both reporting your credit account information, and for accessing to see your creditworthiness when you apply for a new loan. It would be quite rare for one score to be extremely high and one score to be extremely low, since the scoring models are similar and most lenders tend to report to both bureaus.
If you are preparing to apply for a large, important loan, such as a home mortgage, it is important to check both scores before you apply and make sure you get both of them as high as possible.
Canadians can access their credit score and credit report from TransUnion for a monthly fee of $19.95. In addition to your score and report, you will have access to a credit monitoring service for the month as well.
For the month or months that you have a paid service, you will be notified every time a lender pulls your credit report or reports updated account information. Getting notifications will allow you to dispute wrong information much easier and in a more timely manner. The service also comes with identity theft protection.
It typically is not necessary to be a paid member for a long period of time, if at all. It may, however, be worth it for a month or two whilst you are preparing to apply for a mortgage or other large loan.
Equifax offers a very similar credit monitoring service as TransUnion, but in addition, they have a very simple product that is free and allows any Canadian to check their report once per year. The free service from Equifax is not as comprehensive as the paid service from TransUnion, but it will give you a score and report and allow you to easily dispute wrong information.
Even though the scoring algorithms between TransUnion and Equifax are slightly different, doing several things will tend to raise your scores with each bureau. The most important thing to do is pay all of your bills on time, every month. You cannot have a high score when you miss payments.
In addition to paying bills on time, you can keep your scores high by limiting the balances on your credit cards. You don’t need to keep the balances at zero, after all, lenders want to see responsible use of credit, not a lack of a use of credit. By keeping balances low you show the banks that you are responsible and have plenty of income coming in to warrant your spending habits.
Late payments are the bane of any credit score, regardless of the scoring algorithm used. It is also important to know that opening a bunch of accounts at one time will temporarily lower your score. It will add hard inquiries and lessen the average age of your accounts. Depending on the model used, both of those things will cause your score to decrease. While you must have hard inquiries in order to open accounts, and obviously you cannot establish a sound credit history without first opening accounts, make sure you are opening them only when needed, and plan accordingly for when you need a large loan like a home mortgage.
There is a lot of misinformation out there about what does and what does not affect your score. Certain behaviours may or may not be wise, or signal that you are astute with your money, but they have no effect on your score. For example, using a debit card has no effect on your score using either model from TransUnion or Equifax.
How much or how little money you make also has no effect on your credit score. Potential lenders may use this information when underwriting your loan, and you may need to submit tax returns, bank statements or paycheck stubs in order to prove your income when applying for credit, but it will have no effect on your credit score at all. Your credit score is one of many potential factors that a lender may use to determine your creditworthiness.
Checking your credit score or report will also have no effect on your score. There are two types of credit inquiries. A soft inquiry is when you check your own credit report or when a potential lender checks your credit report without your permission for marketing purposes. This is entirely legal and ethical, and banks and other financial institutions use it to send qualified offers of their products to potential customers. Soft inquiries do stay on your credit report but have no effect on your score.
Hard inquiries, on the other hand, can affect your score. A hard inquiry is when you actively apply for credit from a lender. When you apply, the financial institution may check one or both of the credit bureaus. When a hard inquiry is made, it stays on your credit for two years and can lower your score, especially on Equifax, for up to one year. The effect is usually quite small, and of course, there is no way to avoid it all the time, but that is one reason why you should only apply for credit when you need it.
Neither score is more important than the other. Lenders are very well aware that the two scores are usually different. The important thing to remember is to pay your bills on time, do not apply for credit you do not need, and be a responsible borrower.
It is important to be educated on how the credit system works and what you can do to raise your score. Having a high credit score will allow you to get the loans you need with appropriate interest rates. Just remember to be responsible and live within your means.