What is a credit report?
February 2, 2020 | Posted by: Haystax Mortgage
With the significant rise in credit use around the world in the 1980’s credit reporting has become a critical part of our day to day lives. So, the question then becomes, what exactly is a credit report? Equifax, one of the two credit reporting agencies in Canada, has a great video that gives a good explanation. TransUnion, the other credit reporting company, also provides a brief explanation although not in a video.
While the definitions provided are OK, we do think that there is some important information you should have that is not shared. We also want to share why this is important to lenders so you can be better informed.
There are four primary areas that are reported on a credit report:
1) Identifying Information: This section will include your Name, Date of Birth, Social Insurance Number, address and most often also your employment. Lenders will use this information to help them confirm your identity and to validate the information that you have provided on your credit application. Wrong information here can be viewed as a “red flag” to the lender and may cause them to do more due diligence to confirm your identity to protect you, and them, against fraud.
2) Credit Accounts, or Tradelines: This lists the credit accounts that you have and tells lenders when you opened your account(s), type of credit, credit limit, amount owed, and your payment history. Lenders look at this to see how much credit you owe compared to how much you have in limits (called credit utilization) and to review your entire payment history for your accounts. Even if you have a really strong credit score (we cover that in the next blog post) if you have very ‘spotty’ payment history it may impact your ability to borrow when needed.
3) Inquiries: This tells how many times you have applied for credit, when, and with whom. If you are making a lot of credit applications a lender may view you as higher risk. If you apply for a lot of credit it can often be an early warning that you are experiencing financial difficulties and it will cause lenders to be more wary. There is a difference however between a “soft” pull and a “Hard” pull. Equifax does a great job of explaining the difference, and how it impacts you.
4) Public Record and Other Information: In this section lenders will see if you have any collections, bad debts, court action, bankruptcy, or a consumer proposal. It is not ALL bad however! Some of the items that report are other public records, such as if you have a vehicle that has a lien registered against it.
Now that we have covered off the actual sections, what does a credit report really say about us? Well, it gives creditors a complete picture of our borrowing, repayment, and gives them insight into whether or not you are a good risk. Will you miss payments? Will you go bankrupt? Do you have a good history of job stability? Do you move a lot?
A credit report is designed to tell creditors what our history is like managing debt; it also gives them a broader picture of our lives without diving into a lot of detail. In fact, credit reporting is being used in several countries around the world to build out a Social Credit System with the most famous by far the one in China. It is, in some ways, the marriage of a person’s online presence and their credit history.
For most Canadians the thought of this type of rating system is an intrusion into our lives. We see it as a means of controlling the population, of creating a dystopian society where uniqueness is shunned. This is not all that far from the truth.
While we do not have this type of social credit rating in Canada, we do have to understand that a credit report is designed to share with lenders our ability, and willingness, to repay our debts. Think of it as low fat social credit. That means it is important for our long-term financial health to understand, and manage, our credit effectively.
If you are struggling with credit, or need some assistance with how to repair your credit, Haystax has the tools you need to be mortgage ready. Stay tuned for future insights into the world of credit and what your report says about you.