Have you ever wondered what it is that lenders are looking at to determine whether or not you're a good loan risk or not? Despite what a lot of people think, credit reports are not mysterious or impossible to decipher documents. Obtaining one is pretty easy, in fact. Understanding what you'll find when you do is also not an overly onerous task.
Related: Check Your Credit Score (It's Easier Than You Think)
A consumer's FICO score, "a numerical representation of your creditworthiness as determined by Fair, Isaac and Company" (fico.ca), is determined using the following measures.
Your payment history [35 per cent of your score]
Accounts for the timeliness of your bill payments, late payments and any bankruptcies or delinquencies.
Outstanding debts [30 per cent]
The amount you owe, including the debt you've accumulated on your credit cards and how much you owe on installment loans relative to the original loan amounts.
"If your unsecured credit totals, $50,000 and you're regularly using $47,000 of that credit, it's going to have a negative impact on your score," says Jeffrey Schwartz, executive director of
Consolidated Credit Counseling Services of Canada. "If you're using between $20,000 and $30,000 of that credit it shows you can handle a certain amount of credit and that you're not always bumping up against the maximum."
Your account history [15 per cent]
How long you've had each credit account and how often you use them. (Dormant accounts have less of an impact on your score.)
Types of credit [10 per cent]
Different debt types include installment debt, revolving and open. Installment includes loans obtained from financial institutions with fixed payments over a specified term. Revolving credit (credit cards) and open credit include lines of credit that allow the consumer to make use of as much or as little as they want. The mix of credit and debt a person has shows how well they are able to hand their different accounts.
Recent inquires and new credit applications [10 per cent]
Requesting your own credit report for informational purposes (a soft inquiry) does show up on your credit report but doesn't impact your overall credit score. Multiple hard inquiries however, where someone is looking to assess a consumer's credit worthiness, will have a negative impact. "If I'm always looking for credit it's going to have a negative impact," says Schwartz. "It says that I can't handle my finances."
What lenders look for
Overall, he says lenders look at character, capital and capacity – the "three Cs" – when assessing potential loan and credit applicants. "If you go into your local bank and say I want a loan, they're going to ask you questions and get you to fill out some sort of application based on those three Cs."
An assessment of your character, when it comes to handling money anyway, is done by looking at your history of repaying debts. An institution or lender will want to know if you've used credit before and if you've paid your pills on time. They'll be interested in knowing how long you've lived at your current address and worked in your current job.
Capital, meanwhile, includes the resources you have at your disposal to pay back the debt. The lender will look at whether you have any assets, property or savings accounts to back up or pay for the loan if it were to come due.
Capacity refers to your ability to repay the debt. Lenders will look at the would-be borrower's salary (or if they have a job at all), the number of dependents they have and other obligations that could impact their ability to pay.
Related reading: Check Your Credit Score (It's Easier Than You Think)
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Credit Report Myths
Myth 1: Credit reference agencies decide whether I qualify for a deal
Lenders make this decision on a case-by-case basis – the credit reference agency has nothing to do with the decision. It simply collates the information in your credit report and maintains it securely. And it is viewed during the application process.
...and what really matters
Your credit report is the history of your credit accounts and repayment track record that lenders check when you apply to them, to see that you're not over-stretched and repay what you owe reliably. It's important that it is up to date and accurately reflects your circumstances, so you should always check it before making a new application.
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Credit Report Myths
Myth 1: Credit reference agencies decide whether I qualify for a deal
Lenders make this decision on a case-by-case basis – the credit reference agency has nothing to do with the decision. It simply collates the information in your credit report and maintains it securely. And it is viewed during the application process.
...and what really matters
Your credit report is the history of your credit accounts and repayment track record that lenders check when you apply to them, to see that you're not over-stretched and repay what you owe reliably. It's important that it is up to date and accurately reflects your circumstances, so you should always check it before making a new application.
Credit Report Myths
Myth 2: I'm on a blacklist
There's no such thing as a credit blacklist. Where you live, your gender, race and religion don't affect your chances of getting credit either.
...and what really matters
Your address does play one important role when it comes to getting credit – providing you're registered to vote there. Lenders use the electoral roll as a precaution against fraud, to see that you live where you say you do. If you don't appear or are registered at an old address, you may be asked for further proof of residence or even get turned down, so cancel any outdated registration and contact your local government to register at your current home.
Credit Report Myths
Myth 3: I don't earn enough to get any credit
The amount you earn isn't necessarily relevant, although lenders do set criteria for each loan, card or other product they offer and these could include a certain level of income. If you earn very little, there's a greater risk that you may not be able to make your repayments, so lenders may charge you higher interest rates to cover potential losses.
...and what really matters
It's important to do your research before applying, so you know that the deal you want matches your circumstances. For example, you're unlikely to qualify for a prestigious platinum credit card if you're a penniless student. But lenders are principally concerned that you can afford to repay what you owe and have been reliable in the past. So someone earning $200,000 who has skipped some repayments on a $150,000 mortgage might be turned down, while someone earning $15,000 and paying off a $5,000 loan reliably might be accepted.
Credit Report Myths
Myth 4: I'm marked down because the previous occupant of my home went bankrupt
It doesn't matter whether a bankrupt or a millionaire lived in your home, or whether anyone else who lives there now has had financial problems or is experiencing money trouble now – unless you share a joint credit account, such as a mortgage or credit card.
...and what really matters
Having a joint account creates a link between you and means they're named on your credit report as a financial associate. When you apply for new credit, lenders may check their credit report too, because their circumstances can affect your ability to make your repayments. If you split up or an arrangement comes to an end, you should always reapportion any debt and close the account – or you could suffer if your former associate has problems.
Credit Report Myths
Myth 5: A discharged bankruptcy doesn't affect my creditworthiness
Yes, it does. It stays on your credit report for at least six years from the day it went into effect, even if you are no longer bound by the agreement. This may make it difficult for you to get credit or mean that you will pay high interest rates, because lenders may fear that you'll let them down.
...and what really matters
A clean credit history that shows you don't skip repayments and haven't walked away from a debt in recent years is a plus point. Missed repayments usually stay on your credit report for three years, so it's always best to talk to your lender before it gets to that stage and see if you can reschedule payments. Lenders aren't unreasonable – they know that our behaviour changes over time, so a 35-year-old who missed a few repayments when he was a 20-year-old student shouldn't have anything to worry about.
Credit Report Myths
Myth 6: I don't have any credit so I'm bound to get the best deals when I do want it
If you've never had credit or have long since repaid everything you owe and closed the accounts, lenders have no way of knowing how you'll behave in future.
...and what really matters
You need to build a credit history before you apply for anything major. For example, you might ask your bank – which knows you – for a credit card with a low spending limit, use it for everyday items and pay it off every month. That way, lenders will be able to see that you're a sound prospect.
Credit Report Myths
Myth 7: It doesn't matter how many deals I apply forYou might think that only the credit you actually get will count when it comes to your credit score – and lenders are certainly concerned that you could take on more than you can handle. That's why they look at the amount you could borrow on all the cards and loans you have, rather than the amount you actually owe. But applications have an impact too.
...and what really matters
Every time you apply for credit, it triggers a search of your credit report that leaves a record. Other lenders will see this and, if you've applied for lots of deals within a few months, lenders can suspect a fraud or think you are desperate for money. If you're shopping around, you should ask for a quotation search, which won't be visible to other lenders. When you know that you're going to want several deals within a few months, it's worth staggering your applications to avoid future problems.
Credit Report Myths
Myth 8: Checking my own credit report will damage my credit status
Only searches by lenders can affect your credit status. You can check your own credit report every day, if you like, and it will have no impact on your credit score.
...and what really matters
Regular checks on your credit report help you to take control of your finances. You get a snapshot of what you owe and how well you're managing, can spot old accounts that you could close down and identify suspicious transactions that could indicate your ID has been stolen and misused. If you see anything you disagree with, you can challenge it with the relevant lender.
Credit Report Myths
Kate McCaffery is a freelance writer in Toronto, Ontario. Visit mccaffery.ca/kate2.0/ for more information. 
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Reader Comments (Page 1 of 1)
9-25-2010 @ 1:50AM
Canadian Credit Solutions said...
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10-31-2010 @ 12:56PM
Bumf said...
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