Credit scoring is used by lenders, insurers, landlords, employers, and utility companies to evaluate your credit behaviour and assess your creditworthiness.
1. Applying for a loan. Your credit score will be a big factor into the decision of whether you are approved or denied your application for more credit. Your credit score will also affect the interest rate and credit limit offered to you by the new credit grantor – the lower your credit score, the higher the interest rate will be and the lower the credit limit offered – the reason for this is you are considered more of a credit risk.
2. Applying for a job. A potential employer may ask your permission to check your credit file and based on what they read, they may decide not to hire you due to your poor credit history. Yes, having bad credit could cost you a job!
3. Renting a vehicle. When you sign an application to rent a car, the rental company can check your credit history to determine what their risk may be when they loan you their property. So although you are not applying for credit, the application documents you sign provide your written permission to access your credit information.
4. The same is true when applying for rental housing – the landlord may assess your tenant worthiness and their risk by factoring in your credit rating and score, and they could pass you over for someone with a better credit rating.
Other “derogatory” factors which negatively affect your credit rating and the Credit Bureaus don’t like to mention to you are:
1. Errors
One of the major causes of point loss to your credit rating are bureau reporting errors. (They can also cost you financially as shown in the CBC report on credit reporting mistakes) Errors can be delinquent accounts reporting on your file that do not belong to you, late payments that were not late, and credit that is created from identity fraud – therefore not your credit. The Credit Bureaus are paid by the creditors who pull credit bureau files and in turn who report to them. Credit reporting is done electronically, and Credit Bureaus accept the information they are sent without any investigation into the accuracy of the information. Therefore, is it critical that you pull your credit bureau file at least once every year. Only you will know when there is an error on your file, and it is up to you to have the credit bureaus fix it.
Order your file here: TransUnion and Equifax
Look for these common errors:
- Wrong mailing addresses
- Incorrect Social Insurance Number
- Signs of identity theft
- Errors in your credit accounts
- Late payments
- Unauthorized hard inquiries
If there is an error on your file you must contact the Credit Bureau, then it is up to the Bureau to investigate your complaint and to verify the information contained in your file by contacting the reporting creditor. When contacted by the Credit Bureau, the reporting creditor will have to verify the item they have placed on your file. You are entitled to be part of that process.
2. Moving/Time at Address
As previously discussed, a large number of credit file requests within a short period due to moving will lower your credit score. But on top of that, the length of time at your current address will influence your score, so try not to move a lot as it will affect your credit rating. The longer you remain at one address, the more points you receive.
3. Changing jobs/employers frequently
The longer you stay at a job, the higher points your credit score receives. You are seen as having a secure job and therefore being a secure, less risky credit consumer.
4. Having no mortgage, or no housing information on your file
The Credit Bureaus assign certain points for those who have mortgages and those who rent, and deduct points for those whose housing situation is unknown to them. As soon as you pay off your mortgage, the reporting account is removed from your file and you are in the unknown category, which will actually remove points from your credit rating! Credit card and other credit account history will remain on your account even after being paid off and closed, but unfortunately a paid mortgage does not benefit your credit rating. Imagine, you own your own home and that does not benefit your credit rating – does that even make sense? Also, not all mortgages report to the Credit Bureaus.
5. Having high revolving credit balances
When you have high balances that are rotating between different credit accounts, this is a warning sign that you could be in financial trouble and therefore you could be considered a credit risk.
6. Having no debt
Believe it or not, having no debt is bad for your credit score! Here we go again – if you don’t need to borrow money creditors will be trying to throw it at you. If you do need to borrow money and have no debt or debt history well, you will have a harder time of it. If you do not have a history of credit use on your file to provide something for creditors to evaluate, they will see that as a risk, and you will be deducted points on your score for not having credit accounts.
