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A Consumer Credit Rating Primer

By CO Staff @canadaone |

Business owners have a two-fold interest in consumer credit. Many small businesses depend on the good credit of the owners to secure any kind of financing. They will also want to understand credit ratings should they need to extend credit to their consumer customers.

To learn more about how consumer credit ratings are established CanadaOne intereviewed Ken Porter, President, TransUnion Canada. Here is what we learned.

What is a credit rating?

TUC feedback: Credit rating may be a bit of a misnomer. Some organizations, and consumers, refer to credit scores as credit ratings. Credit scores are determined using information from a credit report. A credit report contains information about the nature of the credit relationships a consumer has or has had in the past, the individuals payment performance, personal information and public record information to name a few.

How can you check your credit rating?

TUC feedback: The simplest way for a consumer to check their credit rating is to visit on the Internet and select from the many options available to view personal credit profile and consumer score. Other options including mailing or faxing a request are also available.

What does your credit score tell a creditor?

TUC feedback: A credit score is a sum used by lenders as an indicator of how likely you are to repay your loans. Each lender decides what credit score range it considers to be a good credit risk or a poor credit risk. For this reason, the lender is the best source to explain what your credit score means in relation to the final credit decision. After all, they determine the criteria used to extend credit. Your credit score is generated by a mathematical formula utilizing the data from your credit profile. Lenders have been using credit scores as part of the lending decision for over than 20 years.

What factors will drive a credit rating up or down?

TUC feedback: Various factors determine your credit score, including Payment History, Outstanding debt, Length of credit history, Severity and frequency of derogatory credit information such as bankruptcies, charge-offs, and collections and the amount of credit used compared to the credit available

Do you think that most Canadians understand the importance of having a good credit rating? If not, what do you think are some of the most common misunderstandings that people have?

TUC feedback: Most Canadians never check their credit score: Only 36 percent of Canadians report ever checking their credit score. Younger people are more likely to check credit: Canadians fifty and over (29 percent) are significantly less likely to have checked their credit score this past year than Canadians aged 18 to 49 (41 percent). Children make a difference: 42 percent of households with children have checked their credit score over the past year, compared to 33 percent of households without children. Canadians are yet to understand that reviewing their credit profile often is one of the fastest and easiest ways to ensure that your finances are in order.

Is it true that the number of times your credit rating is looked at has an impact on your credit score? What does this mean for people who are shopping for a loan? Does it make a difference if you viewing your own file?

TUC feedback: "Hard" inquiries, those arising from a credit application, are considered when calculating an individuals credit score. However, a number of characteristics are used in calculating a credit score and it is this combination of characteristics that impact the score. Depending on the type of loan that the individual is seeking to acquire, inquiries are treated differently. Individuals reviewing their own file have a "soft" inquiry placed on their credit file. "Soft" inquiries do not impact the credit score.

What are the most mistakes people make that have a negative impact on their credit rating?

TUC feedback: Typically, not be punctual in paying outstanding debt, high utilization (>50%) of credit limits and having a large number of inquiries occurred over a short period of time have a negative impact on the credit score/rating.

If you discover that your credit rating is poor what can you do to improve it?

TUC feedback: Be punctual - Pay all your bills on time. Late payments, collections, and bankruptcies have the greatest negative effect on your credit score. Watch your debt - Keep your account balances below 50% of your available credit. For instance, if you have a credit card with a $1,000 limit, you should try to keep the balance owed below $500. Give yourself time - Time is one of the most significant factors that can improve your credit score. Establish a long history of paying your bills on time and using credit responsibly. You may also want to keep the oldest account on your credit profile open in order to lengthen your period of active credit use. Avoid excessive inquiries - A large number of inquiries occurred over a short period of time may be interpreted as a sign that you are opening numerous credit accounts due to financial difficulties or overextending yourself by taking on more debt than you can easily repay.

If you run into financial difficulties and find that you are late paying bills, what should you do?

TUC feedback: Consumers have a number of options including reviewing their credit profile to identify where problems exist and getting a baseline for improving performance, calculate a monthly budget and find ways to reduce expenses, negotiate and consolidate, refinance your largest loans such as auto leases and mortgage rates, create a payment calendar that you can stick to, sign up for a credit monitoring service such as that offered by TransUnion to track financial changes over time. Consulting with creditors, financial planner, family and trusted friends will help each consumer determine the most appropriate course of action in each individual case.

How often should people check their credit rating?

TUC feedback: Financial advisers recommend that consumers review their credit at least twice a year to ensure good standing with potential lenders. Checking credit frequently is also a vital first line of defence in combating identity theft.

Which organizations keep track of consumer credit ratings in Canada?

TUC feedback: As a credit reporting agency, TransUnion maintains a secure database of consumer credit data.

Editor's note: The two other Canadian agencies that track credit ratings are Equifax Canada and Northern Credit Bureaus.

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