Back to Basics - What  is a Credit Rating?

Simple stated, your current credit rating is a lender's assessment of your ability to repay your ourstanding loans and credit cards at this particular time. As a result, it's dynamic. Your Canadian credit score will change as your financial situation changes. Improving your credit ranking is usually a slow steady process; destroying your credit history can happen virtually overnight. How to do the former while avoiding the latter is key to establishing a healthy credit rating in Canada.
Good credit makes your financial life more comfortable. It makes long-term financial goals more achievable. Your credit score is a critical factor is any loan or credit card approval process. That's why it's vital to establish and maintain the highest credit score possible.

With a good credit rating, most loan applications or credit card requests can processed right over the telephone or online. It's called "instant  approval." No need to ever visit your bank or credit union! Of course, home mortgages and larger loans still require face-to-face processing with a loans officer but your credit rating is still a key factor even in their lending decisions.

How is Your Credit Rating Determined in Canada?

Your Canadian credit history is based on every reported transaction on your mortgage, loans and credit cards. That means every time you receive or even apply for credit, it's added to your file. Every time you make or don't make a payment on time, it's noted on your credit record. Every time, you close or open a credit card, it's reported to a Canadian credit bureau. So like a clock, tick-tock tock-tock, time after time over time, you are building your credit history ... transaction by transaction.

Eventually comes D-day when you apply for house mortgage, credit line or credit card. Your Canadian financial institution uses three ways to assess your credit history:
1.    Review past dealings with them;
2.    Consider any new financial information you share in your credit application;
3.    Gather third-party credit agency reports on your overall credit history.

The last factor is critical because while the first two indicators may be positive for that particular bank or credit union, your dealings elsewhere might be very negative. That's why credit bureaus exist in the first place.

cenhances your ability to get credit in the future; a poor credit evaluation marks you for denial of credit. For instance, records containing negative reports, such as overdue payments or nonpayments, could make it more difficult for you to borrow or get credit in the future. Any loans officer worth their salt will not even attempt to process a loan application if the credit score is too low because it would be rejected at head office any way.

Since Canadian credit agencies summarize your activities with a variety of financial institutions and consumer companies in Canada, you should request details of your credit report from the two national credit bureaus annually, and certainly before applying for any major loan or mortgage. This will help you to understand your rating and ensure that the information credit agencies are reporting is complete and accurate. You can also correct any mistakes before making the credit application.

To find out how to obtain a copy of your credit bureau report, you may contact the credit bureau agencies directly online at
Equifax Canada or Trans-Union Canada.

Can You Repay Your Credit?

Obviously, banks, credit unions and credit card companies want their money back. As a result, when you borrow funds, you must demonstrate the capacity to repay the original amount plus interest over the agreed period of time. Your ability to repay credit changes over time based on your income and debt load.

Using mathematical formulas, a loans officer will help you determine your debt service ratio (DSR). Your DSR indicates the percentage of your current monthly income that goes toward paying off debt. If these calculations indicate that additional debt may impact your ability to meet or manage your existing expenses, your credit application will probably be declined.

In this instance, the bank representative may suggest ways to restructure your current debt load and recommend a short-term plan to help you get the things you want.

When you offer collateral as security in exchange for credit, the value of your collateral must be accurately determined. Since some assets fluctuate in value, or lose their value entirely over time, certain forms of collateral will be considered more valuable than others.

In general terms, assets such as real estate and guaranteed investments represent better forms of collateral than equity investments or vehicles, or in the case of small businesses, machinery or equipment.

Building Relationships Beyond Your Credit Rating

While getting credit in Canada may seem purely 'objective', you should still build a strong one-to-one relationship with someone in your bank or credit union. The credit rating remains a critical factor in granting any further credit, but financial institutions also want to keep you as a happy customer. A good loans officer will help you understand why a loan was turned down and recomment startegies for improving your Canadian credit rating.

The credit granting process can sometimes uncover aspects of your financial situation that you weren't even aware of. Sometimes an application is declined due to a combination of marginally weak factors, not just one major factor. In cases like this, your loans officer can make suggestions that will improve your eligibility at a later time.

In Canada, credit approval is always based upon your current financial circumstances. Ask your bank or credit union to show you ways to improve your Canadian credit history over time, and create a plan to assist you in meeting your financial goals.

FOR MORE TIPS & TRICKS ON IMPROVING YOUR CREDIT RATING, SEE