“I am dead! My beacon score is 640 only and you said 650 is a good score. It is over for me”. My friend practically cried over the phone. “Calm down! Listen to me. It is not all bad. 640 is not the end for you. There are other ways to mitigate the issue and help you the consolidate debts.” I had to yell so he would stop and listen. Why did I agree to help him again? Ah, yes because we were friends. Darn! I mentioned in my debt consolidation post that I had a friend whom I endearingly called “the cards collector”.
Well, he truly loved the plastic. He is cured of the plastic now. A bad financial scare putting a stop to his love of plastic. At one time, he must have every blasted credit card that ever issued in Canada. So, it was not surprising to me when I got a tearful phone call from him couple months ago asking for advice on how to manage his debts. Let’s just say that he got into financial trouble (the big capital T) because he loved swiping, tapping and inserting way too much. The credit cards that did him in were a sexy little black thing called CIBC Aventura World Elite MasterCard and an expensive and gorgeous gold one named TD Gold Elite Visa with promise of cash rebate. They really got him good with the cash rebate promise. I hate to say it, but: I TOLD him so!
After hearing the tearful and somewhat fearful confession of his spending sins, I felt really bad for my friend. Credit card can be a wonderful financial product facilitating your daily transactions effortlessly saving you a lot of time and effort, if use responsibly. That’s a big IF, because most people don’t. When you misuse the credit card, then it can be your biggest financial downfall. My friend felt into the latter category.
I really wished that I was wrong in my prediction. Though he was irresponsible, I never wished to see anyone in this situation. After much discussion, I believed his best option was a debt consolation loan. Before we could figure out which banks or alternative lenders, we needed to understand what his credit score was.
Credit score is an important indicator for any lender. Most banks typically use beacon score as a key indicator in their lending logic. Thus knowing what his credit score was would be helpful to determine what type of lender he could approach. I also didn’t want him to apply to a bunch of lenders because too many inquiries at the same time would negatively impact his beacon score. So what is credit score and why it is so important?
What is a credit history?
You probably heard this phase from a lot of industry experts or financial planner: “650 is a magic score. Get 650”. Most people’s reaction is: sure, message received: “must get to 650 credit score”. Eh, but why 650 is the magic credit score? And how do I get to 650 credit score? Before we get there, let try to figure out what is a credit history and the rating system because it will help to explain why 650 credit score is important.
In a nutshell, a credit history is a record of debt repayment. Yep, the first time that you received the piece of that “sexy and good looking” plastic in college or university or the first debt that you signed on the IOU dotted line, your lender started reporting your repayment history to credit agencies.
On a regular basis (typically on a monthly electronic file transfer), companies that lends or issue debts to you (including: banks, financing companies, government agencies credit unions and retailers) will send specific debt repayment information related to the debt they have with you to credit reporting agencies.
For Canadians, your credit history is recorded in files maintained by at least one of Canada’s major credit-reporting agencies: Equifax Canada and TransUnion Canada. For consumer lending, Equifax is the first choice for most Canadian banks because they have more extensive consumer data than TransUnion. Sorry, TransUnion. It is the true! Banks use TransUnion for more commercial lending request though. So, these agencies will always make their earnings. Don’t feel bad for them.
You should be aware that your lender will typically request 1 record credit history only. So my fellow Canadians, please pay attention to your Equifax credit report because your lender will most likely uses this record to determine your credit worth. If Equifax record shows a minimal history or no record, then the lender will request a TransUnion credit record.
Someone asked me if he could have a delinquent repayment record if he didn’t pay the money he owed his mom? Well, he should feel extremely awful about what he did (cheating his own mother of cash), but unfortunately the answer was no. Personal borrowing debt without an IOU can’t be reported to an agency because the debt can’t be proven. Now, if you are an irresponsible tenant and don’t pay your rent, then you bet that the landlord can report you to the credit agencies. So be responsible and pay your debts. Ok, I will stop my nagging here.
For my American neighbours, Equifax and TransUnion are also your credit reporting agencies. In addition, you also have Experian. For Canadians, you won’t hear about Experian because they shut down their Canadian operations in 2009.
Why credit score is so important?
Your credit score is an actual judgment about your financial health at a snapshot in time. Credit scoring is used by lenders, insurers, landlords, employers, and utility companies to evaluate your credit repayment behaviours and predicting the probability of you repaying your debts or obligations. The credit-reporting agencies (Equifax and TransUnion) use a scale from 300 to 900. High scores on this scale are good. The higher your score is, the better you look.
1 – Borrowing money.
As mentioned, banks and companies leverage the beacon score extensively to determine your worth as a borrower. In North America, the beacon score is still the most used and trustworthy indicator of a borrower’s repayment probability. So if you want your loan, mortgage, line of credit or credit card application to be approved easily, ensure that you pay your debt on time.
Some lenders also use your score to set the interest rate you will pay. This practice is called “risk based lending”. In a nutshell, depending on how risky you are as a borrower the lender will set a different interest rate for you. So, you may get a loan but the lender will charge you 3% interest rate higher than an average customer if you are deemed risky due to your poor credit score. Lastly, lender may ask for collateral for your loan request (i.e: investment, house etc.) or offer you restricted lending product (i.e: installment loan vs line of credit) if you have poor credit score.
2 – Seeking employment.
In the recent years, credit score has been increasingly used by employers to determine the potential employee’s character. Having a low score can potentially cost you a great job opportunity. If you ever want to work in financial service sector in Canada, you must clean record (no criminal history) and good beacon score. In another word, you need to be bondable. This means that you can be insured by the company in case of theft or loss.
3 – Renting.
Landlords have been increasingly using credit score as mean to assess your worthiness as a tenant. You may lose out on a good place to live if you have poor credit score. I used credit score and history extensively when I assessed my tenant. If someone didn’t pay their bills on time nor had multiples delinquencies, I would pass on them even if I had a good impression. It is just not worth the risk to me.
4 – Utilities and insurance companies.
These companies are also leveraging credit score to determine new customer’s worthiness. With so much at stake, it is worth your effort to keep your credit score up and you shall be rewarded.
How do I know what is my credit score?
You can obtain a FREE copy of your credit history! Yes, there are not many free things, so take advantage of this. You can request for a free copy of your credit history report which will include a beacon score from the credit reporting agencies. For Canadians, you can get your report via mail or fax (if you still own this piece of engineering relic. The reporting agencies still do). Below are the steps to get a copy of your credit report with Equifax for TransUnion
- Complete the form provided by Equifax and TransUnion. Click on the link and complete the form
- You will find the mailing address as well as the fax # for page 1 of the form
- Provide copies of two pieces of acceptable identification. Just give them a copy of your driver licence and passport. They are the most popular and easy pieces to provide
You can also call them and request over phone:
- Equifax Canada – Tel: 1-800-465-7166
- TransUnion Canada- Tel: 1-800-663-9980 (except Quebec) and Tel: 1-877-713-3393 (Quebec residents)
- They will ask you a series of personal and financial questions (may include your Social Insurance Number and/or a credit card number) to confirm your identity. Don’t get agitate. This is for your protection.
You can submit your request online also. Yes, the agencies upgrade their technology from fax to online too! But for fast and convenience service, you may need to pay a fee. TransUnion allows you to order your credit report online once a year for free but they will charge per transaction if you ask for more.
For my American friends, you don’t have to call, use snail mail or fax, you can order online with Annual Credit Report. AnnualCreditReport.com is the official site for US citizens to get free annual credit reports. This right is guaranteed by US Federal law. There are couple of sites tried to mimic AnnualCreditReport to scam customers, so please go to CFPB site and select the link from there to be on the safe side.
In the recent year, CreditKarma has entered the credit reporting market. Credit Karma provides free credit scores and credit reports from national credit bureaus TransUnion and Equifax for both Canadians and Americans. CreditKarma can afford to provide you with this service free of charge because they make money from advertising on their site.
I will end the first part of this series on personal credit history here. I will post the second part which we will discuss in more detail what make a good credit score and how you can build a great credit score that will guarantee your loan approval. Talk to you soon!