Credit Scoring in Canada and the United States
Your credit score is designed to help a financial lender anticipate and predict the risk associated with your acquisition. It acts as a barometer or forecast of your repayment. Taking out a loan is a big investment, and knowing how financial institutions grade your credit report could make the difference in securing that next loan.
Your credit score will be a snapshot of your credit history as reflected by the financial information gathered from the two major credit bureaus, Equifax, Experien and TransUnion.
If you are trying to manage your personal finances, it is important to know what goes into your credit report, who is submitting the credit report request, who is gathering the information, and how your credit score is formulated.
Some of the factors that contribute to your credit score are the timeliness of previous payments made, the timeliness of current payments that you are making, the length of your credit history, and the amount and type of your current debt structure.
The higher your credit score, the greater your chances will be getting financed.
Requesting Your Credit Report
You can request a free copy of your credit report once a year from the three major credit bureaus. Your free copy will be delivered by mail and will not contain your credit score. Alternatively, you can request a copy online and get an instant report with the option to include your credit score, but it will cost you.
Understanding Your Credit Score
Credit scores range from 300-900; the higher the number, the better the score. The health of your score depends on a number of factors.
Information that makes up your credit score:
- Credit card payments
- Telecommunications accounts (mobile phone and internet bills)
- Liens and repossessions
- Bankruptcy
- Delinquent accounts
- Debts sent to collections
- Negative banking information
- Inquiries from lenders and others who request your credit report
Credit Rating
Similar to a credit score, a credit rating splits your credit up into three types and measures your risk for revolving credit on a scale from one to nine:
Types:
I – Installment
Refers to a loan that has both a fixed price and a timeline associated with it and will run until the debt is paid. An example would be a car loan.
O – Open
Open credit is when you borrow money up to a certain max limit and the full balance is due at the end of each period. An example would be a student loan.
R – Revolving
The most common line of credit, this is when you make regular payments in varying amounts depending on the balance of your account, and can then borrow more money up to your credit limit. An example would be a credit card.
Refers to a loan that has both a fixed price and a timeline associated with it and will run until the debt is paid. An example would be a car loan.
O – Open
Open credit is when you borrow money up to a certain max limit and the full balance is due at the end of each period. An example would be a student loan.
R – Revolving
The most common line of credit, this is when you make regular payments in varying amounts depending on the balance of your account, and can then borrow more money up to your credit limit. An example would be a credit card.
Measures:
R0 – Too new to rate; approved but not used.
R1 – Pays within 30 days of payment due date or not over one payment past due.
R2 – Pays in more than 30 days from payment due date, but not more than 60 days.
R3 – Pays in more than 60 days from payment due date, but not more than 90 days.
R4 – Pays in more than 90 days from payment due date, but not more than 120 days.
R5 – Account is at least 120 days overdue, but is not yet rated “9”.
R6 – This rating does not exist.
R7 – Making regular payments through a special arrangement to settle a debt.
R8 – Repossession (voluntary or involuntary return of merchandise).
R9 – Bad debt; placed for collection; moved without giving a new address, or bankruptcy.
R1 – Pays within 30 days of payment due date or not over one payment past due.
R2 – Pays in more than 30 days from payment due date, but not more than 60 days.
R3 – Pays in more than 60 days from payment due date, but not more than 90 days.
R4 – Pays in more than 90 days from payment due date, but not more than 120 days.
R5 – Account is at least 120 days overdue, but is not yet rated “9”.
R6 – This rating does not exist.
R7 – Making regular payments through a special arrangement to settle a debt.
R8 – Repossession (voluntary or involuntary return of merchandise).
R9 – Bad debt; placed for collection; moved without giving a new address, or bankruptcy.