The Ins and Outs of Individual Credit
By Michelle Collins | January 31, 2004
Each time you grant a client credit, that is when you offer to have them pay a bill in installments or at a later date, you are taking on risks. If the client is unable to pay the bill, you've now done the work but have nothing to show for it.
One of the ways to assess your risk in these situations is to run a credit check on your prospective client. This file can then be used to make an informed decision on whether or not your potential client could mean big dollars or big headaches.
It makes a difference if the credit will be granted to an individual or business. With an individual there are privacy issues to consider, and the two reports differ. In this article we look at the ins and outs of granting credit to an individual.
Where to go
In Canada there are three companies you can go to when looking for an individual or business credit file.
Equifax: Perhaps the most widely recognized company, Equifax is based in the U.S. with branch offices in Canada. You can find them online at http://www.equifax.com/EFX_Canada.
Trans Union Canada: Operating in Canada since 1989, Trans Union Canada offers both commercial and individual services for credit checks. They are available online at http://www.tuc.ca/TUCorp/home.asp.
Northern Credit Bureaus: The only major credit reporting company to operate solely in Canada, Northern Credit Bureaus also offers both commercial and individual services. Their website can be found at: http://www.creditbureau.ca.
While obtaining an individual credit report from either of these companies will essentially show you the same information, Equifax Canada President Rick Cleary explains that the commercial reports can differ from one credit reporter to another.
If you are thinking of doing a business to business transaction then you can contact either of these companies and ask for a report. However, if you wish to run a credit check on an individual you will need their consent to have access to this personal information.
What shows up
Cleary explains that an individual report will essentially show you the same information regardless of what company you contact.
What you will see:
- Name, address, and any other identifiers available such as date of birth or Social Insurance Number.
- Organizations or other individuals who have requested this file. All inquires made over the past three years will appear.
- Credit history and banking information which details other current payable accounts. This information will date back six years.
- Public Records and other information which includes past transactions such as bankruptcies, or collection agent activity. This information will be included in the file for six years, except in the case of credit counselling and other specialized debt plans which will date back three years.
The information available in the report will appear for varying lengths of time.
Each of these factors are evaluated and ranked to come up with a score to determine the individual's credit rating. In an Equifax report, for example, Cleary says there are two scores listed. One score will tell you what kind of time frame you can expect payment in, and another is a predictor of significant weaknesses over the next two years.
Here is a break down of Equifax scores:
|R0||A new account. Individual has been approved for credit but has yet to use it.|
|R1||The individual pays accounts within 30 days of due dates, or they have no accounts outstanding.|
|R2||The individual takes more than 30 days to make payments, but pays accounts before the 60 day mark. This can also indicate that they have no more than two current outstanding accounts.|
|R3||The individual takes more than 60 days to make payments, but pays accounts before the 90 day mark. This can also indicate that they have no more than three current outstanding accounts.|
|R4||The individual takes more than 90 days to make payments, but pays accounts before the 120 mark. This can also indicate that they have no more than four current outstanding accounts.|
|R5||The individual has at least one account that is 120 days overdue, but is not rated in the R9 category.|
|R7||The individual has set up a debt plan and is making regular payments through this plan.|
|R8||The individual has had goods repossessed.|
|R9||The individual has a bad debt record and may have had some accounts sent to a collection agency. It can also indicate that the individual has moved without giving a new address.|
Making a decision
You've ordered a credit file, read through the details and are still not sure if you should offer credit to this person. While Cleary points out that every credit granter will have their own criteria for assessing the risk involved, the main thing you should focus on is the past history.
"If I were a small business person looking at giving credit terms to someone I would look at how they are paying other people they owe, and how much are they dealing with. In other words, if I'm dealing with a company that has a couple of employees and they've got a hundred thousand in sales and a couple million in debts, I'm going to be more concerned than if they've got a couple million in sales, and a hundred thousand in debt."