Establishing (and keeping) a Strong Credit History

There is a difference between your credit rating and your credit score. Your credit rating refers to your credit record or credit history. Every time you borrow money, through a financial institution, credit card, store, employer or educational institution, you are making an entry into your credit record. Every time you apply for credit, the company making the loan purchases a copy of your credit record. In Canada, there are two major credit-reporting bureaus: Equifax Canada and TransUnion of Canada.

Your credit history is a good read. It is a biography of your life that was written by following the money trail. It includes your date of birth, your social insurance number, your employers, and your marital status. Anything in the public record, including bankruptcies, foreclosures, liens, judgments, secured loans and even financial counseling, can be reported on your credit record. It also lists every debt you have, including the balances on your credit cards. And like a nasty tattletale, it tells not only how often you have been late with payments, but exactly how late you have been.

Establishing and keeping a good credit rating is one of life's imperatives. With cash transactions slowly becoming a part of history, a good credit rating is necessary to purchase major, and sometimes minor, goods.

A credit score is a number reflecting the weight given to many of the variables within your credit history. Some financial institutions may use their own scoring system, while other lenders use the commercial scores available through Equifax and TransUnion. The score is used to predict how likely a borrower is to repay the loan. Lenders can base their decisions on the character of the borrower, the security offered, the ability to repay, the amount borrowed and the purpose of the loan. Most lenders once used that formula, but now most banks simply enter your data into a computer and receive in return a single number. If your number falls above a pre-determined figure, you receive the loan. Below that number, you walk out the door empty-handed. Not all financial institutions use credit scoring, so make sure to ask your lender how borrowing decisions are made.

Following these steps will help you establish (and keep) a good credit rating and a good credit score:

  1. Request copies of your credit rating and credit score from Equifax and TransUnion. You need both, because each company may have different information. If the information on either credit history is wrong, correct it immediately.
  2. Pay your bills on time. Even if a company allows a grace period, don't use it. It lowers your credit score.
  3. Own no more than two to four credit cards. Fewer cards shorten your credit history; more cards indicate that you are financially stretched.
  4. Keep your debt-to-income ratio under 20 percent.
  5. Pay more than the minimum required on your credit card, or pay off your entire balance if possible. Not only do large credit card balances hurt your score, the interest rate on credit cards is exorbitant.
Credit is a necessary part of life. Make sure your credit rating and credit score do you credit.

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