Credit. We’ve all heard the word used, and used it ourselves. You might have a little credit yourself. Everyone you know likely has it in some way or another; even everyone you don’t know. Most people use credit to buy their first car or home. Many of us credit to book flights and hotel stays. Some of us even use credit to buy our everyday needs. We are all surrounded by credit in its many different forms, but do we all understand what it really is and how your credit works?
The easy answer, of course, is that credit is just money that you borrow. That’s it. You ask to borrow money, and someone who has the dough either says, “sure” or “no way!”. This is the simplest way to look at the word, but this doesn’t even scrape the surface of what credit really means.
Today, credit can be used in a few different ways.
Your credit score should show whether you stick to your word when you agree to pay back money you’ve borrowed. Do you pay it back? Do you do it on time without having to be reminded? Have you ever missed a payment or two, or found yourself unable to pay back the money you borrowed?
Companies that are thinking about lending money to you can take a peek at your credit score and use it to decide whether or not to lend you the money. Your report lists your lending history including loans, credit cards, lines of credit, leases, etc. Basically any money you’ve ever been on the hook for before. The report includes information on your payment habits, what money you may still owe, who you have paid back already, and what you may have not paid back on time.
Your credit score is a number value used to represent everything on your credit report. It is the result of a computer program set up to review what is on your report and convert all that information into a score between 300 and 900. The higher your score is, the less risk someone is taking if they lend you money.
When lenders judge your risk factor after you have applied to borrow money from them, they don’t often look at your credit report. Instead, they just look at your credit score. This number is usually enough to tell them whether or not they should lend to you.
In Canada, you can request your credit report for free as many times as you like, so long as you submit your request in writing. This is different from the USA, where consumers are only entitled to one free credit report, not including their score, per year.
Both your credit score and report are kept track of by credit bureaus. These bureaus are agencies that collect all the information contained in your credit report and give you a score based on that information. Credit bureaus are also where you go when you want a copy of your own credit report, or if you are considering lending money to someone and want to see if you’re taking a risk in doing so. The two bureaus that operate nationwide in Canada are Equifax and TransUnion. If you want a complete idea of what your score looks like, it is best to request your credit report from both bureaus.
When you see your own report, you’ll probably be surprised at how much information is there. Going back six to seven years, all the credit decisions you’ve made will be listed. You’ll see your payment habits, the total money you owe and have borrowed, who you owe it to, and what your limits are on each form of credit you currently have. There may also be surprises too, which is why it’s good practice to check your report every so often. There can be errors or the records of someone else who is using your identity to borrow money. Your personal information can be listed wrong, and your financial information can be incorrect. You should double check at least once per year to make sure that everything listed in your credit report is correct and up-to-date.
Your credit report and score are not always just used to weigh how risky it is to lend to you. They can also be used as additional information for employers when they’re considering whether or not to give you a job. The idea here is that someone with a great score is someone who takes their responsibilities seriously; someone you can rely on and trust and who would be a great employee. On the other hand, a person who has not always done the best job paying back the money they owe, may not be someone that can be relied on in a work setting.
Of course, in real life, things are not always this simple and there can be many reasons why someone finds themselves in trouble with their lenders. Getting sick, getting hurt or losing your job can all make it hard to pay back money you owe, and that can lead to a low credit score. Often, the reasons we have trouble paying back the money we have borrowed are things we don’t always have control over. This is the best reason to limit the amount of money you have borrowed. If you find yourself owing too much money and something you could not predict happens to stop you from being able to pay it back, it doesn’t just affect your ability to borrow money in the future. It can also affect your ability to get a good job. Your credit score and report may also be used by television, internet and phone companies as well as your local utilities to determine if you qualify for an account with them, if you need to put down a security deposit to connect the service, or if you’re just too much of a risk to do business with the company in question at all.
Having a bad credit score can cause a lot of problems in your life. That’s why you need to make good decisions when choosing what borrowing options are right for you and who to borrow from. You should be educated and understand the different things that can happen that will show up on your credit report. You should understand your own ability to repay the money you have borrowed, and take into account the possibility of future problems.
*******
Refresh financial offers custom credit building solutions to help you build your credit score FAST.
Leave a Reply