Many come across the term credit report without really understanding what it is and why it’s important. Here’s a fact – your financial decisions and opportunities depend on your credit score.
Moreover, every financial institution and organization will address your credit report before they decide to trust you. That’s why we recommend finding out more about credit reports, how they work, etc.
Credit Report Explained
Your credit report is like your financial CV that provides valuable insight into your financial behavior to financial institutions like credit unions, lenders, and banks. They can learn a lot about you and your credit history by checking your credit and see if you’re a worthy consumer of their lending services.
They use a credit report to assess the risk associated with lending money to borrowers. In other words, good credit is enough to convince these institutions that a borrower is, indeed, reliable and risk-free.
Aside from being a mirror of your financial behavior, it is also proof that a borrower has all the necessary financial qualifications for a credit card, type of credit, or loan.
The information on this report includes all current loans, payment history, credit account information, current, address, financial connections, etc. Commercial organizations like credit reference agencies are the ones that create credit reports. These agencies are also called credit bureaus. Canada has two leading credit bureaus:
The importance of checking your credit regularly!
Regardless of the type of credit you’re after, you can complete the process without providing your lender with a credit report check or rather allowing them to check your report.
These checks are mandatory, as a credit report tells a lender how risky a borrower really is. It is a determining factor in whether a lender decides to lend a loan to a borrower or not.
While your report tells lenders all about your financial responsibility, it’s essential that you check your report from time to time to make sure there are no irregularities, as the credit reporting agencies are prone to making mistakes. The best moment to check it is just before you apply for any type of credit.
How to check your credit report
The easiest way to check your report is by contacting a reporting agency. These agencies are statutorily obligated to provide you with a free copy of your credit report on demand. You can either do it online or by paying a visit and asking for a physical copy.
The instructions on how to get a free credit report from TransUnion by mail are available here. The instructions for Equifax are here.
It’s most recommended to get two or three different copies from different sources to make sure your report is accurate and up to date.
Things to know about checking your report
Here are three essential things you should know about checking your credit report:
- You’re completely free to check your credit anytime you feel like it.
- There is no limit to how many times you can check it.
- Your credit rating or score isn’t affected by running a credit report check.
Now, it’s also essential to know that checking your credit report alone doesn’t affect you in any way. However, keep in mind that it may leave a trace on your file if you apply for any type of credit and allow the creditor to run a check.
If you do this quite often, it can negatively reflect on your reliability as you’ll seem desperate in lenders’ eyes.
To avoid leaving any traces and affecting your credit records, you can ask for a quotation search rather than applying instantly. That way, the creditors will run their check but without any traces left behind.
Credit Score Explained
A credit score tells lenders whether a borrower has the means to repay on time or not, and it’s one of the determining factors that allow these institutions to decide whether to give a borrower credit or not. A personal credit score is entirely built on credit history.
The usual FICO range goes from 300 to 850, where 300 is considered to be a bad credit score, while everything above 800 is more than excellent. The system used to measure your credit score is called the FICO scoring system.
People with an 800+ credit score are eligible for almost all types of financial products available. The higher the score, the less risky you are. In other words, keeping a high credit score is simply essential for your financial wellbeing.
Types of credit scores
There are two types of credit scores:
- Generic credit scores – the most commonly used by businesses and creditors to determine general risk.
- Custom credit scores – as the name suggests, this is a type of credit score that is created by individual creditors and based on all available information and credit reports of borrowers – usually associated with specific types of credit.
Credit score factors
Your credit score is shaped by credit report elements, also known as credit score factors. These factors include:
- The total amount of your debt
- Types of accounts you have
- Evidence of late payments
- Age of accounts
By checking the factors, you can clearly see what elements affect your credit score the most at the time of calculation, as well as what items to address to improve your creditworthiness. In other words, by understanding these factors, you can improve your score.
The Bottom Line
Your credit tells lenders, banks, creditors, and all other financial institutions whether you’re trustworthy and reliable as a borrower or not. If you want to be able to apply for a loan any time you want, you’ll have to work on maintaining a clean credit report.
A clean credit report is a nice way to improve your credit score, which is vital for getting any type of financial product. Nothing benefits you more than a good credit score. It’s what opens an entire world of opportunities when you need additional funds the most. Work on your credit score to make it as high as possible.