The Facts on Credit Bureaus

The ABCs of Credit Bureaus

Here is a bit of Help to get the credit report you deserve……. 

Clients come to experienced mortgage brokers looking for assistance on all aspects of purchasing a home.  From the beginning of the financing stage to the closing, experienced mortgage professionals can help to educate and inform clients of their options.  First time buyers are often unaware of the process and the steps necessary to secure financing.  Many are also unaware of how their credit history affects their ability to borrow money for mortgages or down payments.

Experienced Mortgage professionals are in a perfect position to help consumers access and understand their credit information.

 

What are credit reporting agencies and credit bureaus? 

A credit bureau or credit reporting agency manages credit information.  There are two major credit bureaus in Canada: TransUnion Canada and Equifax Canada. Tom Reid, Director of Consumer Solutions for TransUnion Canada explains, “TransUnion has 30 years of expertise in credit information management.”  For consumers that means they assist by providing tools to help them manage their finances and for businesses they provide information to assist in evaluating loan applications.

 

Where does this credit information come from? 

Information is provided to credit reporting agencies by lenders through electronic communication.  Once a customer requests or receives a loan or a credit card, that information is submitted to credit reporting agency with the consent of the consumer.

 

Who can access this credit information? 

This information can be accessed by any organization that the consumer has a relationship with through secure means, or by the consumer themselves.

Businesses receive information in a format that is called a credit report.

Consumers receive information in a format that is called a credit profile.

Only authorized companies and individuals can make inquires; these authorizations are often specified in card holder agreements or loan applications.

 

What information is provided in a credit report? 

Information in a credit report will include items such as payment history, outstanding debts, credit account history, any recent inquires into the account and the types of credit a customer has on file, including car loans, credit cards, mortgages, etc.

When an individual first applies to borrow money or open credit card accounts, a credit report is created.  Companies that lend money or issue credit update the information on this credit report on a regular basis including amounts borrowed, credit limits, and whether or not the account is paid on time.

 

What is this information used for? 

Lenders use the information on a credit report to evaluate an individual’s credit behaviour.  Past credit behaviour is an important variable in determining a client’s ability to repay a loan, repay credit debts or repay a mortgage.

It is important for consumers to check their credit report before they get into any major purchases.  If there are any inaccuracies it is critical to have them cleared up right away.

The information on the credit report is taken into consideration when lenders are evaluating loan applications.  Credit bureaus also often provide a credit score, which helps lenders determine the credit risk of potential customers.  Many lenders also use the information on the credit report and apply their own custom scoring system.  This also allows lenders to determine how applicants compare relative to other applications using the same system.

 

What information is provided in a credit profile?

Credit profiles are very similar to credit reports, but are formatted for consumer use.

A credit profile is a snapshot of an individual’s debts and obligations.

A credit profile available online describes the client’s personal information including name, address, phone number and employment information.  Consumers also have the right to add a consumer statement, which is a brief explanation they can add to their file to explain poor credit.  This shows up on their credit profile and credit report.  For example, clients may want to explain to potential lenders that they had an illness, injury or temporary unemployment.

The TransUnion credit profile is formatted with a summary section outlining the number of open accounts, number of payments and outstanding debt.  This is followed by a details section which lists individual credit accounts, balances, and a two and six year payment history.  It also lists any collections accounts, public information such as bankruptcies and any inquires into the credit history and when they were made and who made them.  Equifax also offers access to a credit report online.

 

Credit scores

Credit reporting agencies often have their own scoring systems developed to assist lenders in evaluating applications.  TransUnion Canada uses the Empirica credit score.  Equifax Canada uses the Beacon credit score developed by FICO (Fair, Isaac and Company).  The standard scoring system in the United States is based on scores developed by FICO.

The basic credit scoring formula takes into account several factors from an individual’s credit profile.  The impact of each element fluctuates based on each person’s credit profile.  A regular payment history, an outstanding debt of less than 30%, an established credit history, a minimal number of credit applications and a healthy mix of credit accounts and loans make for a good credit score.

A credit score can be improved.  Changes in a consumer’s behaviour will affect their credit score.  This is important for a client in terms of his/her ability to get financing for their mortgage or to get the best rates available.

“Almost one in five Canadians have checked their credit before applying for a home loan,” according to a TransUnion study.  The flip side of that is that 80%of Canadians did not review their credit before applying for a home loan.

TransUnion recommends that to get the best possible mortgage terms, clients should have an Empirica credit score of above 750.  By assisting your clients in accessing their credit scores you are able to ensure they receive the best term.

If an individual’s score is not 750, paying bills on time, reducing debt balances, avoiding new inquiries into the account and clearing negative inaccuracies form the credit profile can help to improve scores significantly in a matter of a few months.

Credit scores are not the sole tool used by lenders to determine credit-worthiness, but they do give clients an idea of where they stand.

 

Accessing your credit profile

Consumers have a right to view the information in their credit file.  They can receive a free consumer disclosure report by writhing to one of the credit reporting agencies and requesting it.  This report is delivered by mail.

For immediate access to their credit profiles consumers can visit www.transunion.ca.  There is a charge for immediate access to this information but there are also value added options that can help consumers better assess their capacity for increased borrowing.

In addition to a credit report, TransUnion provides access to a credit score.  This information is displayed as a numerical score, with 300 as the lowest and 900 as the highest, as well as graphically to give your clients an understanding of how they fare compared to other Canadians.  It also outlines how potential lenders would view their creditworthiness, from fair to very good.

This credit score information is also accompanied by an analysis, which helps clients by outlining how they can improve their score.  A sample provided on the TransUnion website indicates the individual has too many consumer finance company accounts on the credit report, thereby having too much available credit.  The suggestion is to close a few accounts or have the credit limits reduced.  It also cautions not to close too many accounts, especially the oldest as it could have an adverse affect on the credit score.  Other issues flagged in the sample are high account balances, with the suggestion of lowering them to 35-50% of the limit.  Customers are also encouraged to develop revolving credit with the suggestion of making a few purchases per month on a credit card and paying them off right away.

For an additional fee TransUnion also offers a debt analysis.  The debt analysis helps customers determine their debt-to-income ratio (the difference between the monthly income entered and the monthly amount spent to maintain the debt listed in the credit profile).

Equifax also offers a credit profile online as well as a FICO score and analysis.  The website for Equifax is www.Equifax.ca. The FICO score is presented as a number and also outlines where the consumer fits in terms of national distribution of FICO scores.  The Equifax report shows in details things that need to be done to improve your credit score. It explains in detail what is needed to raise your credit score. It then goes on to explain how to correct errors on your credit report. And then it gives you a brief explanation of the length to improve your credit score. Keeping on track with your credit will benefit you in a lot of ways. A good credit score will help you qualify for the best credit, jobs, insurance, and more. Plus if you take the steps to improve your score, your financial like will be much easier as a result.

 

Jim Amitofski,

Mortgage Broker Professional 

Networth Mortgage Group – Dominion Lending Centres

Direct/Text: 905-903-0012

Email: Info@NetworthMortgage.com

www.NetworthMortgage.com

 

 

 

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