A credit report is an official document held by Canadian credit reporting agencies that deciphers your credit history as well as the current state of your creditworthiness as a potential borrower. In its detail, it contains your personal information, the different credit investigations concerning you, and information of common knowledge. This data, which is adjusted every time you make or miss a payment, can therefore be very useful to you when making a plan to improve your personal finances.
How to analyze your credit report
Credit reports can be hard to analyze for people who are discovering their information for the first time. To help you analyze the data and improve your finances, let’s start by understanding your solvency ratio.
The solvency ratio
When you apply for a loan or to rent or purchase an apartment, it’s your solvency that will allow your creditors to verify that you will be able to honour your commitments. The ratio for estimating your solvency is equal to: equity/assets. A solvency ratio of at least 20% is usually requested by lenders (that the equity is at least 20% of the credit report). Your ratio represents your working capital, which is made up of your current assets added to your reserves and from which are subtracted your short-term liabilities. If your working capital is negative, that means you have insufficient funds to be able to borrow money.
Extremely important for analyzing and improving your finances, your cash flow corresponds to the money entering and exiting your bank accounts at all times. Although multiple reasons may justify a negative cash flow at certain points in life, this situation must be able to be explained, not last too long, and therefore only be temporary. In short, your credit report should generally show more income than expenses.
The codes associated with your credit rating:
- Regarding your payments:
The codes (source: Equifax Canada):
- 0 – Too new to rate; approved but not used.
- 1 – Pays (or paid) within 30 days of payment due date or not over one payment past due.
- 2 – Pays (or paid) in more than 30 days from payment due date, but not more than 60 days, or not more than two payments past due.
- 3 – Pays (or paid) in more than 60 days from payment due date, but not more than 90 days, or not more than three payments past due.
- 4 – Pays (or paid) in more than 90 days from payment due date, but not more than 120 days, or four payments past due.
- 5 – Account is at least 120 days overdue but is not yet rated “9.”
- 7 – Making regular payments under a consolidation order or similar arrangement.
- 8 – Repossession (voluntary or involuntary return of merchandise).
- 9 – Bad debt; placed for collection; skip.
If you have bad credit and therefore a bad credit report, and if this low credit rating is affecting your interest rates for your project (automotive, real estate, etc.), you should know that you can get help to gradually restore your credit rating and consider your finances differently. By paying and respecting deadlines, you can improve your credit rating, making you eligible for lower rates the next time you take out a loan.