If you’ve been following the recent posts here about credit scores, you already know that your credit score is an important part of your overall financial health. There are a number of misconceptions out there around how credit scores work, so I wanted to shed some light on the topic and dispel two of the most common myths.
Why do we have credit scores?
Let’s start with the purpose of credit scores. They are intended to help financial risk managers and others make fair decisions on whether or not to “take a risk” on someone. The risk might involve giving that person a loan (will they repay it?), offering a credit card (will they make the payments?) or approving their apartment rental application (will they pay their rent?). Credit scores are designed to predict the likelihood that individuals will pay their bills. While your credit score is important, it is only one of several pieces of information an organization will use to determine your creditworthiness. For example, a mortgage lender would want to know your income as well as other information in addition to your credit score before it makes a decision.
What does it mean to have a high credit score?
As you’ve seen in the last couple of posts here, your credit score is a number between 300 and 900 which is calculated using the information in your credit file. The higher the score, the more likely you are to pay your bills on time. Your score is not actually one of the pieces of data on your credit file. Rather, it is calculated when needed. Since no one can access your credit file without your permission, your authorization is required any time an organization wants to have your score calculated.
What are some common misconceptions about credit scores?
There are plenty of myths and misconceptions around credit scores, but two of the most common are that we only have one credit score and that checking your credit history will lower your credit score. Here's why they're both not true.
Do we only have one credit score?
Each credit bureau has multiple scoring algorithms and lenders typically request only one of them when making decisions. While all score versions have the same purpose (to predict the likelihood people will pay their bills), there are some differences in the calculations. Here’s an example of an individual’s credit scores, all calculated by different scoring algorithms on the same day: 741, 773, 814 and 831. Which one is correct? All of them!
Will checking my own credit history lower my credit score?
Checking your credit history (often called a credit file or credit report) at least once a year is an important part of managing your personal finances. Not only is it helpful in spotting possible unexpected changes in your credit report over time; it can also help uncover identity theft or fraud. The vast majority of people will find everything is accurate, but it pays to know.
When your credit history is accessed for any reason, the request for information is logged on your file as an inquiry. Certain types of inquiries may affect your score calculation, specifically those that are related to active credit seeking (such as applying for a new loan or credit card). Of course not every new credit application is a sign of financial difficulty, and only a number of these inquiries, in combination with other warning signs on the credit file, might lead to a decline in a credit score.
How can I get a free copy of my credit report?
Checking your own credit history generates the type of inquiry which cannot affect your score. So there’s nothing holding you back from getting a copy of your own credit file. You can request a copy of your Equifax® credit history for free, here.
Where can I get credit help?
Hopefully this insight into the world of credit scores will help you manage your credit responsibly. You owe it to yourself. The good news is Equifax Canada® offers a variety of credit monitoring products. Click here for more information.
Frequently Asked Questions
Have a question? We are here to help.
What is a Debt Consolidation Program?
A Debt Consolidation Program (DCP) is an arrangement made between your creditors and a non-profit credit counselling agency. Working with a reputable, non-profit credit counselling agency means a certified Credit Counsellor will negotiate with your creditors on your behalf to drop the interest on your unsecured debts, while also rounding up all your unsecured debts into a single, lower monthly payment. In Canada’s provinces, such as Ontario, these debt payment programs lead to faster debt relief!
Can I enter a Debt Consolidation Program with bad credit?
Yes, you can sign up for a DCP even if you have bad credit. Your credit score will not impact your ability to get debt help through a DCP. Bad credit can, however, impact your ability to get a debt consolidation loan.
Do I have to give up my credit cards in a Debt Consolidation Program?
Will Debt Consolidation hurt my credit score?
Most people entering a DCP already have a low credit score. While a DCP could lower your credit score at first, in the long run, if you keep up with the program and make your monthly payments on time as agreed, your credit score will eventually improve.
Can you get out of a Debt Consolidation Program?
Anyone who signs up for a DCP must sign an agreement; however, it's completely voluntary and any time a client wants to leave the Program they can. Once a client has left the Program, they will have to deal with their creditors and collectors directly, and if their Counsellor negotiated interest relief and lower monthly payments, in most cases, these would no longer be an option for the client.
