When it comes time to apply for a mortgage, one of the smartest steps you can take is to become well-informed about your current credit rating. This will be one of the key factors used by the bank or financing institution in determining your eligibility for receiving a mortgage as well as obtaining a favourable interest rate.
But before you visit the bank, it's a really good idea to have a copy of your credit report in hand. In this article, we'll discuss what a credit report is, how to get yours, and how to make sense of it all.
Credit Report vs. Credit Score
Although some people use these terms interchangeably, there is a big difference between a credit report and a credit score.
In Canada, there are two credit rating agencies - Equifax (Canada) and TransUnion Canada. These two agencies keep a detailed record of your financial history including loans, credit cards, and other forms of debt. Because merchants and banks report their interactions with you to each agency separately, your credit report might be slightly different with each agency.
Be aware that your free report will be mailed to you via the post, so it will take a few weeks for it to arrive. If you want to get it right away, you can pay for an instant online version. Right now, TransUnion charges $14.95 and Equifax charges $15.50 for instant credit reports.
Your credit score, however, is a number that ranges from 300-900 (higher is better) and is considered to be a "snapshot" of your past financial history. You have to pay to learn your credit score, but most banks or financial institutions that offer mortgage loans will check your credit score at their expense. Just ask the mortgage officer for your credit score if you want to learn where you stand.
Reading Your Credit Report
Once you have copies of your credit report from TransUnion and Equifax, it's important to understand how to read them.
Your credit report will contain information about:
- Any bad cheques you've written.
- Any information about exceeding your account limits (or "bounced" cheques).
- All credit card information, including retail and store cards.
- Any loans you have, including lines of credit and mortgages.
- Any court decision relating to credit.
- Any bankruptcy information.
- Any debts that have been sent to a collection agency.
- A three-year history of every entity (such as a bank) that has obtained a copy of your credit report.
- All property you own with a lien.
- Miscellaneous information including fraud alerts, identity verification alerts, and consumer statements.
Your credit report will also contain a lot of data, including:
- When you opened a bank account.
- Timeliness of payments you've made.
- If you've exceeded your credit limit.
- Your total outstanding debt.
- Public financial records about you, including bankruptcies.
- Your history (if applicable) of making late payments.
- Any debts that were transferred to a collection agency.
Credit Report Codes
Both credit reporting agencies in Canada use codes and numbers to describe the types of debts you have or have had. Your financial history will be displayed in a table using the following letters:
- I - This stands for (i)nstalment credit, generally referring to loans for a specific purchase like a car loan. Instalment credit is repaid in fixed amounts until the debt is fully paid off.
- O - This code stands for (o)pen credit, referring to a pre-approved one-time source of credit that you can access when you need it, up to a certain limit. Most commonly refers to lines of credit.
- R - This stands for either (r)evolving or (r)eoccurring loans. This includes credit cards where you can borrow up to a pre-approved amount on a reoccurring basis.
- M - Used exclusively for mortgage loans.
Your credit report will also contain numbers:
- 0 - Not enough info or credit hasn't yet been used.
- 1 - Paid on time.
- 2 - 31-59 days late.
- 3 - 60-89 days late.
- 4 - 90-119 days late.
- 5 - More than 120 days late (but not a "9").
- 7 - Making payments on time following a debt management plan.
- 8 - Item was repossessed.
- 9 - A bad debt, sent to collection agency, or included under a bankruptcy filing.
Note: Credit agencies never use the number six.
Therefore, if you regularly pay your credit card bill on time, you'll see it listed as an "R1". But if you were 45 days late on a car loan, it might be labelled as an "I2".
It's important, when you do obtain a mortgage, that you understand payments and the effect they could have on your credit report going forward.
If you see any errors in your credit report, it's essential you contact the credit agency right away to try and resolve the problem. Banks considering you for a mortgage will assume your credit reports are accurate, so you'll need to clear up any problems that could negatively affect your credit rating. If you do spot a problem, follow the Financial Consumer Agency of Canada's guide to begin the procedure for fixing the discrepancy.
Once you have your credit reports in hand, you'll see exactly what kind of information is being kept about your financial history, and you'll know exactly what the bank will see when they consider approving you for a mortgage. Being well-prepared helps you to avoid unfortunate mortgage mistakes.