(6 minute read)
It’s that time of year. Yup, the time when we take inventory. Whether you are a personal finance guru or rookie, the landscape to reviewing your credit report is equally important. Alike cobwebs in the attic or skeletons in the closet, your credit report isn’t going to come clean unless you do. First off, the difference between a credit report and a credit score.
Your credit report is an information-rich document attached to your name and social insurance number (or social security number) that compiles and accounts for payment activity (or lack thereof) every place you spend with a registered credit grantor (a lender). Lender’s in this context can be banks, financial institutions, credit card companies, utility companies, auto leasing companies, and retailers. Think of your credit report as feedback about your payment history at any given point in time. Your credit report is generated by a credit bureau – which is a corporation, not a government organization.
Visualize your credit report the same as your once upon a time elementary school report card you received each semester throughout the school year as a result of your attendance and participation in various subjects. The score is compiled of each subject (or in this case, lender). You then receive a definitive average of the combined total (of all lenders). Alike your elementary school report card filled with diverse subjects, your financial report card (credit report) allows you to specifically see which categories there are room for improvement in and with which lender.
Your credit score is a three-digit number derived via algorithm (a mathematical equation) as a result of your combined credit rankings from all sources (lenders). This number is a weighted average. The general public is not privy to how this score is specifically calculated, and there are a few things you’d not expect to grant you a higher score. More on that in another post.
Broadly speaking, your score is a weighted combination of how often you make your payments, if you make your payments on time, if you make your payments in full, the duration of your credit history, and if you have new credit on file.
The higher the score the more creditworthy you are, and less of a risk to whomever is lending you money. The score scale is between 300 and 900 in Canada, and 300 and 850 in the U.S. The ranking goes poor, fair, good, very good, and excellent.
Check your credit score at minimum once per year, and if you’re really on top of your game, check your score with more than once source. Why? Identity theft, for one. Two, to check if there are any errors that could be affecting your credit score negatively. Three, to ensure you don’t have anything outstanding that you’re unaware of. The sooner you catch any of these – the better.
Being negligent in staying on top of my credit happened to me once, okay twice. I moved provinces and then countries, and didn’t cancel my medical coverage/healthcare/HSA, whatever have you.
I moved to the U.S. (god bless Texas) and when I moved back to Canada, I had a huge health care bill to repay that had been on the clock ticking while I was away and unaware of, for each of the month’s I missed payment. This was a big deal in that I owed the government money. It wasn’t a big deal in the end, as when I became aware of the outstanding balance, I paid it (after having a conversation with the bureau). I was 23 years old. Slack be cut, I’ve since learned the value of double-checking loose ends.
Think about that last phone bill before you switch mobile providers, or that last gym payment that doesn’t come out of your bank account, but was coming off of a credit card that either has expired or been cancelled because it’s been lost. Those are things that seemingly fall through the cracks. So it’s not your fault – but somebody has to be accountable. Stay on top of these and other instances by checking your credit regularly.
Where to check your credit score: in Canada there are two major credit bureaus. Equifax Canada Co. (what I use) or TransUnion Canada. In the U.S. there are three major credit bureaus: Equifax, TransUnion USA, or Experian. More on FICO, another widely known credit organization, in another post. There is a difference between FICO and the credit bureau’s; albeit slight there is still a difference.
Credit reports are free, credit scores cost money, but not a lot, and they are worth their weight in gold. My credit score (in Canada) cost me $16 and change. A nominal fee associated with the ability to maintain an eye on your credit.
Don’t stress to the point of cardiac arrest if you have bad credit, but do stress more than a little. Good credit paves the way for things like mortgages, lines of credit, loans of all kinds, merchant (credit) cards, being granted certain jobs, the ability to rent in certain buildings, etc. and more. It’s a topic of definite concern – unless you’re walking around paying cash for everything.
Further details to follow on credit repair and more in a future post. Your first call of duty is to go check your credit score (the entire process will soak up a mere 5 minutes of your life). You’ll find the report part at least half interesting, if you’re anything like me 😉
Light, Freedom & Prosperity, my Wicked Smart Money Babes,