Top Ten Questions About the Canadian Credit System Answered

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The complexity of the Canadian credit system breeds a lot of questions, especially for immigrants, in their quest to understand the Canadian credit system. In this article, Julie Kuzmic, Senior Compliance Officer, Consumer Advocacy at Equifax Canada provides answers to the top ten questions immigrants ask about the Canadian credit system.

Julie: Many people are worried about getting their credit file checked because they think it will affect their score, but it (does) not. Please check your credit file! It’s important to find if there are any errors (in your file). Check it now before you’re in the middle of some urgent situation because if there’s something off, you’ll have time to fix it with less stress. I recommend you check your report annually with the two credit bureaus in Canada.

Julie: Never miss a payment. Missing a payment when you have a shorter credit history will have a more significant effect than if you have a long solid credit history. You want to avoid any negative report on your credit because you’ve got less to go on in your credit report, so one negative thing has more impact. If you can’t make the full payment on your credit card, it’s better to make the minimum payment on time than make the whole payment late. Your obligation is to make the minimum payment before or on the due date. From a personal finance perspective, it’s always better to pay it up in full every time if you don’t want to pay interests, but from the credit score perspective, at least making a minimum payment is what you need.

Julie: Yes, it is okay to pay it down as you use it during the month, and it can actually be helpful. Your card is still identified as an active card because you used it, even if you immediately transfer the money back every time you use it. For instance, if you spend $100 from your card and immediately put back the money for the balance to go back to zero. It’s still an active credit card reported with a zero-dollar balance to the credit bureaus. That’s a zero per cent utilization rate, that’s even better for your credit score calculation.

Julie: Phone bills are one type of credit that isn’t necessarily included in all credit score calculations because it only started being reported to the credit bureaus about seven or eight years ago. There are different versions of credit scores that are used by different lenders. They are all numbered between 300 and 900 and they aim to predict the likelihood of paying your bills on time. Still, the ingredients are in a different order. So, one element might count for a little bit more, while another might count for a little bit less. One might not use a phone bill in the credit score calculation, and another might use a phone bill in the credit score calculation. If you were to apply for accounts at different banks, a bank that accepts phone bills will be able to add your phone bills when they calculate your credit score but another bank that doesn’t accept phone bill will tell you that you don’t have a credit history.

Julie: It could help your credit score because it will reduce your utilization rate. Assuming you have a $2000 limit on your credit card and usually spend about $1000 every month but pay it off on time. If the bank offers to increase your limit to $4000 and you accept the increase, your utilization rate will reduce by 50 per cent utilization to 25 per cent utilization. In that case, you are only using one-fourth of your available credit. The increase will help your utilization sheet, even though you are still spending the same amount of money. There might be situations where the score might take into account how much unused credit you have which might work against you because you already have unused credit yet you are applying for more new credit. But generally, I feel pretty safe saying it’s a good thing that your utilization will go down.

Julie: First of all, were that 30 per cent comes from is usually a misinterpretation of a pie chart that shows the different percentages of what goes into the credit score calculation. The biggest piece of the pie is payment history, which is the most predictive, and that’s 35 per cent of the pie. Utilization is about 30 per cent of the overall score calculation. The word utilization next to a piece of pie that shows 35 per cent or 30 per cent makes people misinterpret that to mean that utilization should be below 30 per cent, but that’s not actually what it’s saying. It’s saying that utilization is about 30 per cent of the overall equation of your credit score. However, lower utilization is generally better. Is it better to keep it below 30 per cent? Yes, but will you see a huge drop in your score if you go up to 32 per cent utilization from 29 per cent? I really doubt it. But why do we even care about utilization, and why is it in the score calculation? Statistical analysis of actual credit files in Canada shows that people who missed payments have a higher utilization rate. That doesn’t mean that every person with high utilization is guaranteed to start missing payments. It’s just a correlation that a higher utilization can contribute to a missed payment. Therefore, it is more favourable in the credit score calculation if the utilization is lower.

Julie: That’s a great question, but it’s a bit of a mixed answer. Every time your credit file is accessed, it has to be recorded in your file by law so you’re going to have a hard enquiry for every one of those credit pulls. The bureaus understand the fact people shop around for mortgages and for cars. Suppose somebody applies for five different credit cards at one time within a week, and they get approved for all of them. In that case, they are going to end up with five new credit cards in their wallet. Still, if somebody applies for five mortgages, it’s not because they are going to buy five properties, and the same is true of cars. It’s because they are shopping around for a car loan and maybe test driving at different places. So, car loans and mortgages get special treatment. Just the inquiries relating to those two types of loans get grouped together as one shopping event but where that grouping happens is when the score is calculated, so you are always going to see all the hard enquiries on the credit report itself. They are not going to get grouped there because they have to all show, but when the score is calculated, it’s going to look at the time frame for the multiple hard enquiries related to a mortgage, how far apart are they and that window is seven days up until forty-five days that they would get grouped as one shopping event. Inquiries are usually one of the lowest factors in credit score calculation. It’s about 10 per cent of the overall analysis, so if you have a longer, more solid credit history, then having more hard enquiries is not going to hurt you as long as you don’t have late payments and any negative record on your file. If you’re new to Canada and you are within the first year, try not to apply for more credit than you actually need because you are still in that building stage.

Julie: Anything negative like a missed payment or even an item in collections typically stays on the credit file for six years. However, as it gets older and closer to the six-year point when it would be removed from the file, it would count for less in the score. If you had a missed payment last month and you calculate your score and then compare that with your score five years later, as long as it has been positive since then, and there haven’t been any missed payments, I would expect to see a better score as time passes.

Julie: There are a couple of reasons. One is that Equifax and TransUnion use different algorithms. For example, maybe one of them puts a higher rate on the number of credit cards that you have, and the other puts a higher rate on the overall number of credit accounts that you have, and it doesn’t matter how many of them are credit cards. Depending on which algorithm is used, there’s also that situation where some of them ignore mobile phone payments, and others don’t. Even if you have precisely the same source file, it’s very common to see different numbers coming up at the end. The second reason is that there could be some differences in the data that is on your Equifax report and TransUnion report. Sometimes, there are creditors that only report to one of them. If you are banking with the major banks, then I would be surprised if it wasn’t on both. One major difference you’ll find in the reports is the enquiries. Each company that gives credit will typically have a relationship with either Equifax or TransUnion. The bigger ones would have a relationship with both, but when you apply for credit, they are going first to one or the other depending on their business relationship, and that’s the one that will have the hard enquiry on their credit report. For example, if I go to CIBC to apply for a card, they get my consent to check my credit history. If they pull my history from Equifax, the hard enquiry goes on my Equifax credit file. Still, my Trans Union credit file is never going to show that hard enquiry because CIBC never went to Trans union to pull my credit file. But when they approve me for the card, and I start to use the card, it’s going to be recorded on both credit bureaus.

Julie: No, it doesn’t and here’s why. Laws are different in every country about what gets reported on credit reports. Even in the US, which has a similar system to Canada, credit scores have a maximum number of 850, and Canada has a maximum number of 900. Also, when you think about the process of developing the credit score and algorithm, there is some type of data that don’t get reported to the credit bureaus in Canada that might be reported in the US. It would be dangerous to pick an American credit file and use it in Canada. Not only will the algorithm not apply, but the report would be based on different data, and it might actually be illegal to allow said data from the US to be used in Canada because the rules would be different.

On a final note, credit scores are not moral judgments. It’s just a number based on one piece of your financial picture. Your credit report doesn’t have any information about your account balances, investments, or property. Those things are all fundamental aspects of your financial situation. It is not intended to be a percentage assessment of you or how good of a person you are. If you’re new to Canada and the credit system, it could take a bit of time to establish your credit history, but there are options, so don’t be discouraged.

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