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THE ULTIMATE GUIDE TO CREDIT RATING IN CANADA

THE ULTIMATE GUIDE TO CREDIT RATING IN CANADA

A credit rating is a quantified assessment of the creditworthiness listed by some  credit reporting agencies, of a borrower or with respect to a particular debt or financial obligation. The Canadian credit bureaus give ratings to each credit history’s items detailing the type of credit being used and how quickly payments are made.  A credit rating can be assigned to any entity that seeks to borrow money—an individual, corporation, state or provincial authority, or sovereign government.

These ratings can range from 1 to 9, “1” means you paid your bill within 30 days of its due date and “9” means you never paid your bill or that you’ve made a debt repayment proposal with the lender. Along with the number, you will see letters which represent the type of credit being used: I, O and R. There’s “I” for instalment (e.g. a car loan), “O” for Open (e.g. a student loan) and R for revolving (e.g. a credit card).


In Canada, a credit score is a 3-digit number which is a simple shorthand of creditworthiness that allows the lender to discover a potential borrower’s credit risk calculated using a form of Fair Isaac (FICO) credit scoring.

The scores generally range from 300 to 900. The higher the score, the better. If you have scores between 800 and 900, you’re in excellent shape. Credit ratings apply to businesses and government, while credit scores apply only to individuals.


However, Canadians cannot borrow or lend money unless they have a solid credit score. The two national credit bureaus in Canada, Equifax and TransUnion are responsible for creating the credit score and credit reports based on the information they receive about each borrower from their lenders. These rating agencies are paid by the entity that is seeking a credit rating for itself or for one of its debt issues.


How does it work? 

As mentioned above, the credit bureaus, TransUnion and Equifax are the two major sources for providing credit reports in Canada. Your credit score is based on your credit report, which you (and your lender) may access upon request. The reporting companies issue credit reports to lenders, insurers, and other organizations in order for them to evaluate your creditworthiness.

Example is as follows :

  • When you apply for a new credit card : The lender/creditor requests a copy of your credit report from one or both of the main credit bureaus. It is important to provide consent before a creditor can pull your credit report or credit score.
  • The Lender’s Assessment: The lender may use your credit report, your credit score, and any other information you provide (such as income or debt information) to decide whether to approve your request and which interest rates to offer.
  • The Lender’s Decision: If you are granted a credit card, the creditor reports that account to the credit bureaus, then consistently updates it every 30 days or so. The updated information includes your balance and payment activity.
  • Your Credit Profile Updated: The credit bureaus revise and update your credit report as they receive new information from creditors/lenders. The next time you apply for a credit card or other credit product, the process repeats itself.


Why is it important?

A high credit rating indicates a high possibility of paying back the loan in its entirety without any issues; a poor credit rating suggests that the borrower has had trouble paying back loans in the past and might follow the same pattern in the future. The credit rating affects the entity's chances of being approved for a given loan or receiving favorable terms for said loan. A credit rating not only determines whether or not a borrower will be approved for a loan but also determines the interest rate at which the loan will need to be repaid.


Credit ratings also play a large role in a potential investor's determining whether or not to purchase bonds. A poor credit rating is a risky investment; it indicates a larger probability that the company will be unable to make its bond payments.

A short-term credit rating reflects the likelihood of the borrower defaulting within the year. This type of credit rating has become the norm in recent years, whereas in the past, long-term credit ratings were more heavily considered. Long-term credit ratings predict the borrower's likelihood of defaulting at any given time in the extended future.


Where to check your Credit Score and Credit Rating?

There are two ways of pulling your credit report; one is free, and the other has a small fee.


Free Method

If you want to pull your credit score for free then you will have to contact Equifax Canada or TransUnion Canada. They will then send you your report by mail. The advantage, of course, is that it’s free, but the disadvantage is that it may take some time for you to receive your report. You will be able to see your credit report, but not your credit score. 


Getting Your Report Online

If you want to get your credit report online and instantaneously then there will be a fee (usually around 25$). The advantage here is that there is an option to see your credit score, and you can see it instantly.

Third-Party Providers Third-Party Companies have partnered with a credit bureau to provide their clients with access to an online portal where they can check their credit score and credit report for free or for a small monthly fee.


NOTE :

Don’t Be Afraid of a Fresh Start -

Consult a credit counsellor for understanding the terms and condition before investing. In Addition, any inquiry you might have about credit scores, reports, ratings, and more reach out to the nearest bank branch. 


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