How credit reports and credit scores work in Canada
Credit reports and credit scores may sound similar, but they function differently.
What is a credit report?
A credit report is essentially a summary of a person’s credit history. Yours is created the first time you apply for credit, borrow money or purchase an item on credit. Lenders will send your information to credit bureaus or credit reporting agencies. It will also keep a record of other financial transactions, including:
- Open and closed credit cards and bank accounts
- Credit inquiries from lenders in the past 3 years
- Payments to your phone and internet providers
- Department store and retail credit cards
- Mortgage payments
- Bounced cheques and non-sufficient funds (NSF) payments
- Any debts sent to collection agencies
- Any issues like identity theft
- Liens claimed against assets you use as collateral
What is a credit score?
A credit score, on the other hand, is a three-digit number based on the activity in your credit report. Credit scores range from 300 to 900. The higher your number, the better you are at managing credit and repaying your debts, and the more likely it is that lenders will loan you money at a better interest rate.
Your credit score can and will change over time based on multiple variables. For example, it drops if you miss a payment deadline, and it rises if you use your credit responsibly (and make payments on time).
Why is a good credit history so important?
Honestly, it’s because your credit history impacts your life quite a bit. Lenders want to know how you handled credit in the past, as that’s a good indication for any future credit.
Who might look at your credit report? Credit card providers, mortgage lenders, potential employers, landlords and even insurance providers will check your report before offering you a credit card, a job or any kind of loan.
If you have a low credit score or no credit score—as many newcomers to Canada do—it’s worth getting a credit card to start building your credit history. You might not get the apartment you want, or you might not get the job you applied for, especially if it’s finance-related, as you may be deemed high-risk for roles that involve accessing money. You may also need a co-signer for any loans.