Understanding the Canadian Credit System

A Conversation with Equifax on Credit – Part 1

With the level of misinformation and contradictions on credit history and score on the internet, understanding the Canadian credit system is a feat achieved by very few. Immigrant Muse Editor, Oyin Ajibola had a scenario-based and insightful conversation with Julie Kuzmic, Senior Compliance Officer, Customer Advocacy at Equifax, one of Canada’s two credit bureau to help immigrants better understand the concept of credit in Canada.  

IM: How does Equifax calculate my credit score? 

JULIE: Canada operates a positive credit reporting system. This means that all information about your credit account gets reported to the credit bureaus – Equifax and TransUnion.  For instance, paying your bills on time would be positive information while late or missed payments would be negative information. Some countries only report negative information to their credit bureaus. Understandably, some immigrants have a very negative association with the credit bureaus, if they’re coming from a place where having a file with the credit bureau is negative. However, in Canada, most of the major lenders, banks, car loan companies, credit card companies will send their customers’ information to the credit bureaus monthly, which includes account number, name, amount of last payment, type of loan, credit limit (where appliable), payment history (including late payments). Credit score is calculated based on the data that is in the credit file of the customer at the time it was calculated.  

IM: So, if my credit score is calculated today but my master card payment isn’t recorded until tomorrow, does that mean that my credit score could be different tomorrow?  

JULIE: Yes. Scores go up and down every day, and that’s totally normal because the information can change depending on when your credit providers send your file to the bureaus. Credit score is intended to be a statistical prediction of some likelihood that somebody will pay their bills on time. It is not the ability of a person to pay their bills because the credit score is based on the information in the credit file. The credit file doesn’t have information like…your employment status, income, bank account balance, investments, or properties. None of these are in your credit report, so a credit score can’t assess your ability to pay your bills. Often, a credit score is one of many input that a bank or lender will use when deciding about your credit application. When you apply to a bank or creditor for some type of credit or loan, they seek your consent to pull your credit history. With your permission, they’ll pull your credit report, and your credit score would get calculated right then based on the information available in your credit file at that moment. The creditor will also ask for other information such as your current employment status, income, bank account balance, and other active loans you have, among others. A lot of people think that credit score is the only thing, but it is not. There are cases where people have great credit scores but were denied credit because the lender requires that they are employed, and it doesn’t matter if their credit is excellent, or they have a million dollars in the bank. 

IM: I assume that a positive credit information adds to your credit score while a negative information reduces the credit score. What other factors affect my credit score? 

JULIE: Yes, although that’s a very simplified view but there’s a very complicated calculation that happens behind the scenes. The following factors are important when it comes to your credit score: 

1. Payment history: this is the most predictive piece of information that is on your credit file. Your past behaviour of making payments on time is predictive of your future behaviour. This is not to say that if you have made a late payment, then the assumption is that person will always make a late payment. That’s where the complexity and other factors come into the equation.  

2. Utilization: this is the amount of your available credit that you are currently using. For instance, if you have a credit card that has a limit of $2000 on it and at the time that the account gets reported to the credit bureaus, you owe $1000 on it. You have a utilization of 50 per cent on that card. Statistically, people with a low utilization make their payments on time. If you’re looking to increase your credit score, reducing your utilization can have a positive impact on your score. 

3. Mix of credit accounts: for instance, do you have five credit cards, or do you have two credit cards, one car loan – which is called an installment loan, and a line of credit? The right mix depends on other information in your credit report. The statistical analysis of actual credit files of people shows that if somebody has an item in collection on their file, then the optimum mix for that person is no more than two credit cards but if somebody doesn’t have an item in collection then any number of credit cards is fine and there isn’t going to be any negative impact of credit mix to their credit score calculation. I see blog posts that claim the best combination to ace your credit score is two credit cards, one line of credit and one installment loan. That may be true for some clients but that’s based on their circumstance at the time their scores were calculated but that’s not necessarily true for everyone. So that information is misleading.  

4. Credit history: this is the amount of time a person has been using credit in Canada. The whole point of credit score is to create a level playing field so everybody will get evaluated using the same criteria. If you think back to like 100 or 200 years ago, if somebody asked for a loan, the bank manager would look at the person and say “I grew up with your father. I know he is a good man, so you can have the money”, or “I don’t know who you are, you are new to the community, and I don’t know if I can trust you”. Statistically, there is nothing like age, ethnic background, religion, marital status, gender or even sentiments in your credit file. It’s an irony that something that was intended to create a level playing field feels like a barrier for people who are new to Canada. Many newcomers come to Canada with a lot of money but can only get approved for a credit card with a very small limit because they don’t have a credit history in Canada. The bank might have some products to offer somebody in that situation or some introductory level credit products. It takes a few months before you would have enough information in your credit history to calculate a score.  

5. Credit application and enquiry: this is the amount of hard credit enquiry on your credit file. This makes up about 10 per cent of your score calculation. Most people obsess about credit inquiry, even though it is a relatively small part of the equation. When your credit file gets accessed, this goes into an access log of who accessed your credit history, when and why. The bureaus collect this information because you have the right to know who has been accessing your credit files and it allows you to know there’s a potential fraud when there’s an inquiry on your file you didn’t consent to. Somebody may be trying to apply for credit in your name. The main difference between a hard and soft enquiry is the purpose of the enquiry. If the enquiry was because you were applying for credit, that’s called hard enquiries. Non-credit related enquiries such as a landlord of a new rental unit checking your credit with your permission or when you access your own credit file, which is free, do not count in your credit score calculation. Also, when a potential lender accesses your credit file, they don’t see the soft enquiries. 

We highly recommend you pull your credit report at least once a year because you want to make sure everything is accurate. You wouldn’t want to be told that you don’t qualify for credit when you need it the most because of an error in your credit file. You know on time if there are potential signs of fraud or errors on your file and you can initiate an investigation to rectify that on time. 

Soft enquiries don’t impact your credit score. It doesn’t matter if you’re accessing your credit score on the bureaus’ website or banking apps, it would never affect your credit score calculation.  

CAUTION: There are lending brokers that offer access to your credit reports and credit scores and inform you of credits you might qualify for based on your credit report. They send these credit offers to you and if you accept any of the offers, there’ll be a hard enquiry on your file. However, if you only access your credit through them without accepting any offer, it’s a soft enquiry and won’t be used to calculate your credit score. 

Part two of this conversation will be published in the next issue. It considers various credit-focused scenarios that Equifax clarifies.