Monday, April 12, 2010

Canadian Credit Reports

What is a credit report?
A credit report is a history of how consistently you pay your financial obligations. A credit report is created when you first borrow money or apply for credit. On a regular basis, the companies that lend money or issue credit cards to you (banks, finance companies, credit unions, retailers, etc.) send the credit reporting agencies specific and factual information about their financial relationship with you – when you opened up your account, if you make your payments on time, if you miss a payment, or if you have gone over your credit limit, etc.

Equifax Canada receives this information directly from the financial and retail institutions and retains it to help other lenders make decisions about granting you credit. Because your credit report contains all the information received from your lenders and provides a picture of your financial health, other lenders will request your report when they are determining whether or not to grant you a loan. Your credit report is a history that will help them determine what kind of lending risk you are – if you are likely to repay your obligation on time or not.

How often should you do a credit check on yourself?
You should do it yearly (a consumer’s request does not affect your Beacon score) to make sure the reporting is correct, there isn’t a theft in identity, a dispute reported correctly, bankruptcies discharged, collections registered paid or if you’ve co-signed a loan and that person has paid on time or not.

What is a Beacon Score?
A Beacon Score is an indicator of how likely a consumer is to pay a loan or credit card as agreed. It is only one piece of information that credit grantors use when evaluating an application for credit. A Beacon score is based solely on information in a credit file maintained by the credit reporting agencies.

The way a consumer has handled credit in the past may indicate how they will manage credit in the future. Beacon scores cannot predict with certainty how a consumer will manage credit, but they do provide an objective estimate of how likely a consumer is to repay on time and according to the terms.

The Beacon Score is calculated from a consumer’s Equifax credit file:

What information is used to calculate a Beacon Score?
A Beacon score is calculated in a mathematical equation that evaluates information on a consumer’s credit file compared to information patterns in millions of past credit files. The score can then identify the level of future credit risk for this consumer. It is a snapshot of the consumer’s credit risk picture at a particular point in time.

What is the range of Beacon Score?
Beacon scores range from 300 to 850, but the majority of scores usually fall within the 600’s to 700’s.

Since there is no one universal “score cutoff” used by all lenders, it is hard to say what a good score is outside the context of a particular lending decision. For example, a score of 750 may qualify you for a platinum credit card, whereas a score of 675 may indicate you’re a better match for a standard card.

Mortgage Brokers are able to give guidance on the criteria that they use for a given mortgage product. Based on the Canadian population’s Beacon scores, the ranges and percentages of scores are:

4% are below 550
4% are in the range of 550 – 599
6% are in the range of 600 -649
11% are in the range of 650 – 699
19% are in the range of 700 – 749
27% are in the range of 750 – 799
24% are in the range of 800 – 849
5% are over 850

While many lenders use Beacon scores to help them make lending decisions, each lender has its own strategy, including the level of risk it finds acceptable for a given credit product.

What type of information is used in calculating a consumer’s Beacon Score?
The Beacon score evaluates five main categories of information. Listed from most important to least important, these are:

1. Payment history – Approximately 35% of a consumer’s score is based on this category.
• Payment information on accounts such as Visa, MasterCard, American Express and Discover; retail department store accounts; installment loans; finance company accounts and mortgage loans.
• Public record and collection items such as bankruptcies, foreclosures, wage attachments, liens, judgments and delinquencies reported to collection agencies.
• Details on late or missed payments (delinquencies) and public record and collection items, specifically focusing on how late they were, how much was owed and the recency and frequency of the occurrence.
• How many accounts show no late payments.

2. Amounts Owed – Approximately 30% of a consumer’s score is based on this category.
• The amount owed on all accounts.
• The amount owed on different types of accounts.
• Whether a consumer is showing a balance on certain types of accounts.
• The number of accounts with balances.
• How much of the total credit line is being used on credit cards and other revolving credit accounts.
• How much of the installment loan accounts is still owed, compared with the original loan amounts.

3. Length of Credit History – Approximately 15% of a consumer’s score is based on this category.
• How long the consumer’s credit accounts have been established. The score considers both the age of their oldest account and an average age of all accounts.
• How long specific credit accounts have been established.
• How long it has been since the consumer used certain accounts.

4. New Credit – Approximately 10% of a consumer’s credit score is based on this category.
• How many new accounts they have.

• How long it has been since they opened an account.

• How many recent requests for credit they have made, as indicated by credit reporting agencies in connection with transactions initiated by them. The score does not take into account requests a creditor has made for a consumer’s credit file or score in order to make a pre-approved credit offer, or to review the consumer’s account with them, nor does it take into account a consumer’s request for a copy of the credit file.

• Length of time since creditors made credit file inquiries.

• Whether a consumer has a good recent credit history, following past payment problems.

5. Type of credit use – Approximately 10% of a consumer’s score is based on this category.

What kinds of credit accounts they have and how many of each.

What types of information are NOT used in calculating a consumer’s Beacon Score.
• Age, race, religion, national origin, sex or martial status.
• Salary, occupation, title, employer, date employed or employment history.
• Where the consumer lives.
• Certain types of inquiries such as promotional, account review, insurance or employment related inquiries.
• Any information not found in the consumer’s credit file.
• Any information that is not proven to be a predictive of future credit performance.

Why do lenders use Beacon scores?
Typically, lenders want to see how consumers have managed their credit obligations in the past to help them determine if they should approve the request for credit and the terms of that credit extension.

Beacon scores are an extremely valuable guide to future risk based solely on credit file data. The higher the consumer’s score the lower the risk to lenders when extending new credit to a consumer. The score is an objective measurement of the consumer’s credit risk.

Lenders may also evaluate other types of information – such as data a consumer provides on the credit application (income, how long they have lived at their residence, other banking relationships they mat have, etc.) in their loan evaluation process.

How often does a consumer’s Beacon score change?
Credit files are continually updated with new information from creditors. The Beacon score is calculated based on the latest “snapshot” of information contained in a consumer’s file at the time the score is requested. Therefore, a Beacon score from a month ago is probably not the same score a lender would get from the credit-reporting agency today. Fluctuations of a few points from month to month are quite common.

How can a consumer improve their score?
It takes time and there is no quick fix. In fact, quick-fix efforts can backfire. Scores reflect credit payment patterns over time with more emphasis on recent information. The best advice is for consumer’s to manage their credit responsibly over time.

Scores automatically improve, as ones overall credit picture gets better. That means showing a historical pattern of paying your bills on time and using credit conservatively.

Here are some suggested tips for consumers to follow:

 Pay your bills on time. Delinquent payments and collections can have a major negative impact on your score.

 If you have missed payments, get current and stay current. The longer you pay bills on time, the better your score.

 If you are having trouble making ends meet, contact your creditors or see a legitimate credit counselor. This will not improve your score immediately, but if you can begin to manage your credit and pay on time, your score will get better over time.

 Keep balances low on credit cards and other revolving credit. High outstanding debt can affect a score.

 Pay off debt rather than move it around.

 Re-establish your credit history if you have had problems. Opening new accounts responsibly and paying them off on time will raise your score in the long term.

 Note that it is OK to request and check your own credit file directly from the credit-reporting agency or through an organization authorized to provide credit files to consumers.

 Apply for and open new credit accounts only as needed.

 Have credit cards but manage them responsibly. In general, having credit cards and installment loans (and paying timely payments) will raise your score. Someone with no credit cards, for example, tends to be higher risk than someone who has managed credit cards responsibly.


 Close unused credit cards as a short-term strategy to raise your score.

 Open a number of new credit cards that you do not need, just to increase your available credit. This approach could backfire and actually lower your score.

 If you have been managing credit for a short time, do not open a lot of new accounts too rapidly. New accounts will lower your average account age, which will have a larger effect on your score if you do not have a lot of other credit information. Also, rapid account build-up can look risky if you are a new credit user. Do your rate shopping for a given loan within a focused period of time. Beacon scores distinguish between a search for a single loan and a search for many new credit lines, in part by the length of time over which inquiries occur.

If derogatory information is removed, will a Beacon score increase?
It depends. It is impossible to say how important any single factor or new information is in determining a Beacon score because the importance of each factor depends on the overall information in the credit report. What is important in scoring is the mix of information, which varies from person to person and for any one over time.

For some people, a given factor may be more important than for someone else with a different credit history. In addition, as the information in a credit report changes, so does the importance of any factor in determining a score.

Some helpful tips are:

 If there is inaccurate derogatory information on a consumer’s credit report, advise them to get it corrected.

 The score evaluates derogatory information in several ways – how often, how recent and how severe. If a consumer has a pattern (e.g. several derogatory items and late payments) of this type of behavior, removing one of these may not impact the score very much.

 Paying off a derogatory item such as a collection or charged off account will NOT remove that item from the report. The fact that it happened is still important and evaluated by lenders and by the score.

Be aware that:

• Paying off a collection account, late pay or derogatory item will not remove it from a credit file. It will stay on the file for seven years along with any dollar amount associated with the past due.
• Closing an account does not remove it from a credit file. A closed account will still show up on a credit file, and may be considered in calculating the score.

Will a consumer be penalized for shopping around for the best rate on a mortgage?

Looking for new credit equate with higher risk, but most credit scores are not affected by multiple inquiries for a consumer’s credit score from auto or mortgage lenders within a short period of time. The Beacon score treats these as a single inquiry, which will have little or no impact on the credit score.

This is how it works. The Beacon score ignores all mortgage-related inquiries that occur within the 30-day period previous to an inquiry from a mortgage lender (called the “buffer” period). And prior to that buffer period, the scoring software also notes when earlier inquiries were made – if any – and counts back 14 days from each one. The score then counts all mortgage-related inquiries made within any 14-day period as just one inquiry.

For example; John Doe is shopping for a mortgage loan and a lender gets his credit report on November 30. John’s credit report also lists three other mortgage inquiries that were made earlier that month. The Beacon score ignores those previous mortgage inquiries because they all fell into the 30-day buffer period.

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