What is a credit file?
The credit file has two main components:
The first, your credit rating (the famous R1 and R2), which measures the time you take to pay each of your debts;
and then, your credit score, based on 5 factors ranging from your repayment habits, the number of creditors, and the use you make of your credit limits.
In summary, the credit file is, so to speak, the medical file of your finances: the better the healthy habits you have, the better your health will be!
Credit rating definitions
Here is an overview of the different credit ratings, with their meanings:
R0 The file is too new to be classified, credit is authorized but not used;
R1 Paid within 30 days of billing date, or having no more than one late payment;
R2 Paid within 30 and 60 days from the due date, or having not more than two late payments;
R3 Paid within 60 and 90 days from the due date, or having not more than three late payments;
R4 Paid within 90 and 120 days from the due date, or having not more than four late payments;
R5 Payments are at least 120 days late, but not yet assigned a score of “9”;
R7 Debts paid at the end of a debt consolidation loan, or a Voluntary Deposit at Court, or any other similar arrangement, such as a Consumer Proposal;
R8 Repossession of property, either voluntary or involuntary, or a return of property, vehicle, or merchandise;
R9 A bad debt, a debt placed with a collection agency, having moved without providing a new address, or having filed a Bankruptcy.
The “R” preceding the number signifies that it is a revolving credit, such as a credit card or a personal loan.
If the debt is a Conditional Sales Contract, as in the case of a vehicle loan, the preceding letter will be an “L”.
In the case of an open line of credit, the preceding letter will be an “O”.
Finally, the preceding letter “M” refers to a mortgage.
Nobody knows the precise formula used to arrive at the result. However, the credit bureaus do give us clues by explaining the elements that are taken into consideration and their weight in the final result. They are as follows:
- Payment History (35%)
Any payment delay of 30 days or more will be noted in your file and will negatively affect your score. The longer the delays, the greater the damage. So avoid them at all costs. Make note that even when a late balance is paid in full, the late payment event will be noted in your credit file for 6 years!
- Balance owing in relation to the credit limit (ideally 30%)
The average amount owed in each of your accounts influences your score. An average of more than 50% of the credit authorized negatively affects your score, even if you pay the total balance at the end of the month. The ideal is to stay at 35% or less of the authorized limit.
- Age of your accounts (15%)
If your accounts were set up a long time ago, your creditors can more easily assess your repayment habits. So, the longer the history, the better your score. The score takes into account your oldest account and the average age of all your accounts. Keep the oldest open and avoid opening too many new ones.
- New credit applications (10%)
Whenever a lender checks your credit file for a loan or a credit card, it is noted in your file. The principle is that if you are looking for credit, you are more at risk of getting into debt. Knowing this, avoid, as an example, filling out multiple credit card applications in order to have a better chance “to win a trip”!
- Number and variety of creditors (10%)
Creditors believe that the more creditors you have, the more you are at risk of getting into debt. It is therefore in your interest to limit the opening of new accounts, especially if it is the same type of credit (ie., credit cards). That being said, to optimize your score, it is good to have a variety in the types of credit (ie., a credit card, a line of credit and a credit card from a department store).
It takes time to build a credit file. Unfortunately, it can also be quickly affected by an unfortunate little forgotten cellular account. We must therefore be vigilant, only ask for credit when we really need it, limit the number of creditors to avoid oversights and measure the level of indebtedness to remain at all times well below acceptable norms (see Debt Ratio).
Finally, given the very high amount of information processed by credit bureaus each year, errors in your file are always possible. Make it a habit that every two years you request from each credit bureau a copy of your credit file (by mail, no charge!) to ensure that everything is properly noted.
If you should have any questions, please do not hesitate to contact us at 1 877 995-2433.