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Personal Finance

Baby, they've got your number: A credit report's secret sauce

February 24th, 2013 by

A credit score is a bit like a secret recipe - what does your number say about you?

 
 
 

Hey, excuse me. Your credit score is showing. Your bank can see it. So can lenders and landlords. Perhaps even your employer’s had a look. Unfortunately, much like that persistent piece of toilet paper that sticks to the bottom of your shoe, you might not be aware of it – and what it’s saying about you.

If you’ve ever applied for a loan, you know that your credit score counts. Unfortunately, most of us don’t know much about the shadowy numeric score that can literally determine our financial fate. Here’s what you need to know about this important number, and what you can do to ensure it’s telling it like it is.

Settling the credit score

First, let’s sort out a major source of confusion. There are two different documents that detail your credit: a credit report and a credit score. A credit report is a history of what you’ve borrowed, what you owe, whether you make your payments and when you exceed your credit limit. If you have a credit card, it’s in there. If you’ve taken out a loan, it’s on the list. If you’ve failed to pay your cellphone or Internet bill, that may show up there too. Ditto if you’ve filed for bankruptcy.

Your credit score, on the other hand, essentially attempts to summarize this history. In Canada, there are two credit reporting agencies: Equifax and TransUnion. They compile the information in your credit report and use it to create a score that falls somewhere between 300 and 900. The higher your number, the more likely you are to be able to not only get a loan, but to borrow at a competitive rate. Unlike the more complicated credit report, a credit score provides a simple way for lenders to size you up, and determine how much risk might be involved in lending you money.

What goes into a number

A credit score is a bit like a secret recipe; we know the key ingredients that go into the pot, but because the calculations used to develop these scores are proprietary, we don’t know how much of each ingredient is thrown in. A little available credit here, your debt repayment history there, and voila: a score that’s designed to reflect how likely you are to repay your debts. You can get more details about what impacts your credit score here. Overall, however, if you pay your bills on time every month and keep credit card and loan balances low, you should be able to build a pretty healthy credit score – and keep it that way.

But here’s where things get a little tricky for borrowers: You may have a few different credit scores floating around (although they should all be within the same range). How is that possible? For one thing, the credit scores calculated by each credit reporting agency may differ somewhat. This is because while both Equifax and TransUnion use the same factors to calculate their scores, they may not weight those factors in the same way. Your local bank may also score you differently. That, according to the Financial Consumer Agency of Canada, is because there are different scores provided to banks, which again may be weighted differently based on the bank’s needs.

Oh, and there’s one more thing that might confuse your credit score: the information used to calculate it might be plain wrong...

Baby, they’ve got your number

According to a 2005 report by the Public Interest Advocacy Centre, 18 percent of Canadians who checked their credit reports found errors, and about 10 percent of that group believed their scores had gotten in the way of their ability to access financial services. The problem is that many more people may be paying higher interest rates or encounter other credit problems and not even know why.

It’s every consumer’s right to call out credit reporting errors – and have them corrected. With that said, the process isn’t exactly easy. Here’s how to go about it:

  • Step 1: Get the details

The first step to protecting your credit score is to find out what’s on your credit report. The Canadian Office of Consumer Affairs recommends that consumers do this every year. The first thing to know is that your credit report can be obtained for free from both Equifax and TransUnion, assuming you get it by mail or in person. If you want a copy of your credit score or you want to receive your report more quickly online, you’ll have to pay for it. Both agencies also sell other premium services. Just remember that you are entitled to a free report ever year.

  • Step 2: Look for errors

While knowing your score is helpful if you want to apply for a loan, you should look for errors on your credit report.  Typical errors include loans that were repaid on time but weren’t reported as such, or open accounts for utilities or credit cards that you may have assumed were closed long ago. Whatever you find, if the information is inaccurate, it’s time to work on having it corrected or removed from your history.

  • Step 3: Speak up

If you find inaccurate information on your credit report, the first thing to do is to dig up some evidence for your case. This might include receipts or other paperwork that would prove that you’re right and the credit bureau is wrong. Once you have that together, you can file a dispute with both Equifax and TransUnion. You can also contact the lender or company involved in the error, and ask them to back you up by sending updated documentation to the credit reporting agencies.

  • Step 4: Take it to the next level

According to a recent report by the U.S. Federal Trade Commission, about 5 percent of consumers had errors in their credit report that were serious enough to materially affect their score. That amounts to tens of millions of inaccurate scores. In Canada, the percentage of material errors is likely similar, as previously noted, but a 2012 report by the CBC found that only 500 errors had been reported to provincial authorities over the past few years. That number points to cases that weren't resolved by simply asking the credit reporting agency to make a change. Contacting provincial consumer agencies is an option for Canadians; they can provide some assistance and resources. If the problem is with the lender, you may be able to file a complaint through their formal complaints-handling process (assuming they are federally regulated.)

Even if the lender and credit reporting agencies are cooperative, it may take some time for your score to change. In meantime, you can submit what’s called a “consumer statement” to the credit agencies. This note is attached to the relevant item on your account and serves to provide some explanation of the error to potential lenders.

The final straw may be to sue the credit bureau. There are no statistics on how often consumers resort to this, but it does happen. A recent report by “60 Minutes” found that legal action was one of the only ways for some badly spurned consumers in the U.S. to get their financial lives back on track.

What’s your number?

If you haven’t had a look at your credit report recently, you might just be walking around bearing the financial equivalent of a scarlet letter – and not even know it. The credit reporting agencies have got your number. But don’t let it remain a mystery. When it comes to your credit, what you don’t know can hurt you.

 

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