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A three-digit number that can cost you thousands

A three-digit number that can cost you thousands

The first time that checking my credit score went to the top of my to-do list was at a grocery store as my debit card was declined and my face turned beet red.

Uh oh. There was more than enough in the account to cover the food intended for the family dinner at the cottage, so why did I have to enlist help to buy groceries?

A panicked call to the bank confirmed my fear: my card had been cancelled because it had been compromised (thanks for letting me know!). I was on vacation in another province, so their invitation to drop by my branch wasn’t helpful but at their suggestion I had a fraud alert put on my accounts with the two major credit reporting agencies in Canada.

TransUnion Canada and Equifax Canada maintain your credit report, which tracks how responsibly you use credit. This report is used by banks and lenders when you apply for a mortgage, as well as insurance companies, landlords and employers. You are also assigned a score, which affects your ability to get loans; a low score can mean higher mortgage rates and premiums for insurance coverage.

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This number is important, and can mean the difference between getting a mortgage or not; it’s a big deal.

Credit report vs. credit score

The credit agencies keep track of your credit history: how long you’ve had accounts, if you make minimum payments on time, if you pay your bills promptly and if you go over your credit card limit. Bankruptcies, liens and accounts closed for caused will all be listed too.

Your credit score is assigned based on your financial behaviour. The numbers range from a low of 300 to a perfect score of 900. A high score can save you a lot of money in the form of lower interest rates.

How to check your credit score

You can get your credit report (a.k.a. a “credit file disclosure” or a “consumer disclosure”) for free from Equifax and TransUnion by mail, or more quickly for a fee online. Unfortunately you have to pay to access your own credit score. Both reporting agencies charge $16.95 per month for this information.

Companies such as Mogo offer a free credit score with monthly updates, but you must sign up for an account and their Prepaid Visa card charges various fees for ATM withdrawals and account inactivity.

Soft check vs. Hard check

A soft credit check is when you check your own score, you’re pre-approved for a mortgage or a routine check by your insurance company; this doesn’t affect your credit score.

A hard check is done with your permission by a third party for a bank loan, mortgage or line of credit. This will affect your credit rating, and it’s a concern for lenders if you suddenly do more hard checks than usual.

What can affect my credit score?

Not paying your bills on time. “Never ever miss a minimum payment, even if it’s $1,” says Chantel Chapman, Financial Fitness Coach and Credit Score Expert in an email exchange.

“Also, even if you pay your credit card off every month, set an imaginary limit and never borrow more than 70 percent of your actual limit,” she adds. “If the credit card company reports your utilization ratio the day before you pay off the entire balance and your card is maxed or close to it, your score could drop significantly.”

Chapman explains that 30 percent of your credit score is made up of your utilization ratio, but you can quickly turn this portion of your credit rating around if you fix the ratio, within 30 to 60 days.

How can a low credit score affect me?

A low score can haunt you for years. You can be declined for loans or forced to pay higher interest rates. Even employers can check credit ratings. “If an employer has two ideal candidates that matched up in every way but one had a very poor credit history, they may lean towards the one with a better score,” says Chapman, adding that utilities may require a deposit if you have a poor credit score.

Do insurance companies check your credit?

“Yes, we use credit scores as a rating factor in homeowners’ insurance,” says Leonard Sharman, spokesperson for The Co-operators. “In fact, credit score is used as a rating factor in most homeowners’ insurance policies in Canada.”

He explained that credit scores have been demonstrated to be an accurate predictor of home insurance claims, and that there is a “link between credit scores and the frequency and severity of insurance claims,” and so they’re used to set rates along with other factors such s the age and construction of the home, location and claims history.

How can I build good credit?

It’s good to build up your credit score by using credit responsibly, says Scott Hannah, President & CEO of Credit Counselling Society in Canada. You don’t have to carry a balance, but make sure you pay at least the minimum payment every month as even a $10 delinquent payment can affect your rating and it can take years to reestablish good credit. He suggests that using over 50 percent of available credit can impact your credit rating.

How can I avoid fraud?

Hannah suggests having two cards, one with a higher limit and one lower that you use for online transactions or if you’re concerned it could be stolen. He also suggests choosing a PIN that’s not easy to guess and always shield your hand when entering it in stores so that if your card is compromised, you will have fewer issues being reimbursed by your lender.

How can fix a bad financial situation?

One option for getting out of a bad financial situation can be debt restructuring, says Pat White, Executive Director of Credit Counselling Canada. Negotiating with lenders with the help of a non-profit third party can negatively affect your credit rating, but once clients are in this position, it’s common that their credit score may already be poor, she says.

Know where you stand

Check your credit rating at least yearly to look for mistakes or even fraud. Whether you request your report by mail, pay a monthly fee to Equifax or TransUnion or use another source, managing your debt responsibly can pay off — literally.