Credit Cards, Credit Score, Credit History and Credit Bureaus in Canada — Sharkhacks credit FAQ

“Sorry Sir! It looks like you have been declined for a credit card. You might want to call them and check why you have been rejected. Have a nice day!

I could not believe it! It was my 3rd or 4th time applying for a credit card in Toronto. The cashier made others wait in line while she tried to process my credit card application. My credit application got declined again!

I thought to myself : “How come my wife who did not have a job at the time got a credit card easy breezy while I’m the one who worked and held a job and yet I got rejected. Freaking Walmart would not give me a credit card, PC Financial rejected me ! everyone rejected me. This is so unfair! I will show them. F********”

This is how my credit life started in Canada. No one would lend me, no one would give me a credit card. My car broke down and when I tried to lease a new one I got rejected as well. It was all a long series of rejections. I was not Poor. I was not Not making ends meet. I was NOT in debt. I did NOT really “need” the credit card per say. I needed the car for sure, but I was trying to build my credit history. Build my credit file. What’s worse is that every time I applied and I got rejected it counted against me. My shitty score became a little bit shittier.

One day while I was trying to lease a car the car salesman who felt bad for me after I got rejected gave me his words of wisdom: “It’s ok. Don’t feel bad. It happened to all of us when we first came here. Now they reject you. But later when you get your residency they will be begging you! They will be in your house begging you to take their credit cards. You will have plenty of options to choose from”

Indeed this guy was wise and he knew it. What do you do if this happens to you? Stay tuned while I answer these questions and more in the FAQ below.

Sharkhacks credit FAQ

So what is Credit anyways ?

In Banking and Financial term your credit is your REPUTATION as a borrower. It is an indicator (or multiple indicators) that tells your CREDITORS how likely you are to re-pay any debt you OWE them. It therefore controls your ABILITY to BORROW money from various creditors.

Why do I have to / need to borrow money?

Short answer is you DON’T. You really DON’t need to borrow money. In fact there are plenty of people around the world who live their life and die without having to take on any debt.

However if you CHOOSE to borrow money, I highly recommend you borrow money for the right reason.

What are the right reasons to borrow money?

The only right reason(s) to borrow money is to use this additional money as a Leverage.

Let’s define leverage here (from google)

Leverage:

use borrowed capital for (an investment), expecting the profits made to be greater than the interest payable.

I would argue that any other use of CREDIT is BAD! Only this should be the definition of Good Credit.

A good example of leverage (even though it is more complex than I would like) is buying a home.

For example let’s say a home costs 1 million dollars. If you are going to wait to save 1 million dollars you may end up waiting forever, and by then home prices would have risen (thanks to inflation) and you won’t be able to buy the home. In this case you would be able to use a bank loan as leverage. The bank will give you money to buy the home NOW. and you promise the bank to repay them slowly and gradually, and for their trouble you pay them back interest too.

Is this a good debt situation (leverage) or bad debt situation? Was it a wise decision to buy the 1 million dollar home? the answer is : it depends! It depends on a whole bunch of factors. If home prices go down instead of up then you are screwed! it isn’t leverage! .. you ended up with less money (or in this case less equity) than you had initially. This is a BAD BAD investment.

Maybe you could have had better luck buying a smaller place, or no place at all.

A simpler example is if you have a job today but your job doesn’t pay well, and there is a Job in another city for which you have to drive (you cannot take public transport) and you don’t have a car. In this case you can buy the car, and the debt in a way is considered leverage, because it overall increased your income or earning.

Unfortunately life it isn’t always black or white. It is Black and White and many shades of grey in between (wink)

fifty-shades-of-grey

The problem with the leverage concept I shared above, same as investing, same as life, is that we make decisions based on incomplete information. The world is a complex place and for us to make perfect decisions we need perfect information. Something that does not exist.

However since we are dealing with financial information then a couple of financial tools and concepts should help us make better financial decisions. So as not to risk making this blog post longer than it is, and to avoid making it too technical and boring I will list the concepts here, and maybe go deeper in another post. The CRITICAL concepts for anyone to understand are

TIME VALUE OF MONEY: What is better if I give you 100 bucks today or 120 bucks in one year? Hint: depends on interest rate!

NET PRESENT VALUE, FUTURE VALUE: since interest rate and inflation go up / down then we need to be able to calculate how much money is worth today vs some point in the future.

OPPORTUNITY COST: This is where we mostly blow it. We look at a single investment and say.. Oh yea it is a good investment, without looking at alternatives to invest the same money. From math I know that renting a house at a certain rate is WAY better than buying a house and paying mortgage. The difference between the rent and mortgage put in the bank with a decent rate of return will make me CAD $200,000 richer in a few years than owning a place!

What is the other good reason to borrow?

Another good reason to borrow is to build your credit / credit score/ credit history, so that you can borrow later for the purpose of leverage!

This sounds stupid, it is also counter intuitive, but basically the idea is if you never borrowed before, and if you don’t have credit history, then your credit score is non existent or zero. Lenders are not sure whether they can trust you with their money since you have not borrowed before. So you need to borrow, and return the money, in order to ‘build that reputation and trust’.

Alright I understand what CREDIT is, but who is keeping score?

In Canada there are two credit bureaus. Private companies that gather all of your financial information from financial institutions, lenders, and businesses and makes it available to you as well as to other financial institutions and lenders. These two in Canada are Equifax and Transunion. These companies collect your information from your Bank, Telecom Carriers (since Telecom carriers , when you are on a post-paid plan, treat you as having credit), car companies (if you are holding a lease, or bought a car with financing), credit card companies, and anywhere were you have received credit. This information is then used to build your credit file, and to evaluate your credit score. Your credit file and score are then made available to lenders to understand how safe or risky you are to give money to.

Pro Tip: By law credit bureaus have to make your credit history and credit score information available to you for free once a year. You can go to Equifax and Transunion website and order your free report. Both companies also offer paid options where you pay them online and get immediate access to the info. They also offer other financial products that are good to look at. With that said if you want your FREE report they will make you jump through hoops. You cannot access it immediately online, you have to fill a form and fax it or email to them, maybe you have to stand on your head too, I don’t know but they make it easier for you to get this info if you are paying. You pay and get access immediately online. If you cannot find how to access the free report it is because they put this info down the page in smaller fonts so look carefully, or give them a call and ask them. This way you actually cost them money, and they learn to make sure this info is clearly available!

What kind of information is in my credit file or credit report ?

Your credit file generally consists of the history of all accounts you have with lenders, and how good you are at paying back these lenders. When you apply for an account (such as credit card) lenders typically do a credit check to get your history and make sure you are a good person to lend to. When you have your accounts active lenders also continue to report on your transactions to the credit bureau; how often you make payments, whether you missed payments, how much you owe, etc…

Typically an entry in your credit file will have the following information for each account :

  • date the account has been opened.
  • how much total you owe the lender
  • whether you make your payments on time, and when you made these payments.
  • whether you miss payments, and how many payments you missed in a 30 day, 60 day, 90 day period.
  • whether you go over your credit limit.
  • Date the account has been closed or cancelled (if closed or cancelled)
  • Reason for closing the account (you closed it, lender closed it, etc..)
  • Type of the credit / account : There are generally two types of credit: revolving or open-ended, and loans or closed ended. A credit card is revolving because this isn’t a fixed amount for a fixed period of time, you can borrow and return money forever and ever. On the other hand a car loan is fixed, once you have paid the full amount on your car loan you are done. You cannot borrow anymore.

Pro Tip: Sometimes shit happens and you forget to pay a credit card statement. Don’t panic just yet. Do the following: Pay it as soon as you remember. Give the credit card company a call and tell them you missed a payment and that you paid it right now. Ask them if this will impact your credit file and whether they reported (or will report) this to the credit company. In lots of instances the reporting on your credit file does NOT happen in real time or daily. It is typically done quarterly (every 3 months) so there is a good chance they have not reported it yet and that they can make sure it won’t be. In instances where it has been reported already you can still try to argue with your lender that you paid it and ask them to remove it from your file. If you are nice enough, or smart enough you can get them to comply.

Pro Tip : Don’t go crazy applying for credit cards and financial accounts like I did when i first landed. Every time you try to apply (whether you are accepted or rejected) your creditor runs a credit check against your file. These credit “Inquiries” matter. They appear on your credit report, and affect your score and how lenders view you. They view you as trying to have way too much debt. Not a good sign.

Pro tip: Soft inquiries: Sometimes lenders, and the credit bureau themselves have the ability to do a ‘soft inquiry’. An inquiry that does NOT impact your credit score because it is an inquiry to your file not for the purpose of lending. If you are trying to apply for a mortgage or some other financial products you may notify whoever is doing this for you that you are concerned with your credit score (especially if you are shopping for mortgage), then they may have the option to issue a soft inquiry to check your history and score. They will see your info but will not issue the loan to you until they run a hard check. When you also ask the credit bureau to provide you with your history and score (which they have to do by law!) then this is also a soft inquiry.

Pro tip: If you are shopping for a mortgage or credit card and you know you the inquiries will be hard (not soft) ones then it is better to do it all within a 2 week period, go and shop around within two weeks. This is viewed better and that you are ‘shopping around’ as opposed to ‘trying to borrow too much’.

What is my credit score?

Your credit score is a number between 0 (never seen this but I assume you can have 0 score) and 900 (the best score ever, the perfect score, I wonder who has this score). Generally speaking the higher the score number the sexier you are (financially speaking of course) to your lender. This number is not static and changes all the time based on new information that the credit companies gather such as you opening new accounts, closing accounts, late payments, etc.. Average scores in Canada are between 300–900.

How is my credit score calculated?

Lottery machine

No they don’t use a lottery machine to calculate your score but its close! I have been banging my head against the wall trying to understand the exact formula but the truth is each credit bureau uses their own formula. However generally here are the variables that impact your score:

  • Payment history: This is basically information of when you paid your bills, whether you missed payments or you are always late, if you are written off or sent to collection agencies, and if you declared bankruptcy. The later your payments the worse your score becomes.
  • Use of available credit : this is also called your credit utilization. This is a ratio of the total debt available to you vs how much of that you are actually using. The smaller the ratio the better your score. Example: if you have a credit card with a 5000 dollar limits, have a car loan for 5000, and have a credit line for 5000, then the total “available” to you is 15,000. If you paid half of your car loan, use half of the credit card, and you are not using any of your credit line, then you are using 5000/15000 = 1/3 ~= 33% . Generally speaking you want to be under 35% . This is the golden ratio.
  • Length of credit history: The longer you have your account open, and in good standing, the better it is.
  • Number of inquiries: we talked about this before, but the more inquiries you have, the more risky you look to lenders , as if you are trying to borrow too much!
  • Types of credit: This is revolving vs loans which we discussed above.

Pro Tip : if you have a credit card that is old and you don’t use , but if it is your first credit card that you have, it is NOT a good idea to cancel it, specially if you are not paying any fees on it. Therefore it is better to leave it open and not use it vs close it. This isn’t the absolute truth and there are some debates on this; for example some folks claim that even though you close it, it will not suddenly drop of your file, but will take it a few years to go away, and by then other cards will be old enough, but I recommend better be safe and not cancel. Why cancel anyways?

So who cares what my credit score number is?

Lenders and businesses use your credit file and score to see if they should lend you money and what interest rate they should charge you. If you are too risky then lenders will either not lend you, or lend you with crazy high interest rates (to offset their risk). Also if you try to rent a place landlords will typically ask you for your credit history to make sure that you are not broke , in debt, and that you can pay their rent. Some landlords may decline you if you don’t have , or don’t have a good credit history.

Pro tip: Monitor your credit history. Check it at least once a year. Also if a credit card offers you a credit monitoring service for free, take it! There are two things that can happen to your credit file that are out of your control and can ruin your score:

  1. Identity theft and fraud : Sometimes there are incidents where people get access to your social insurance and financial info, assume your identity, and use your credit file/ history to buy stuff. If this happens don’t panic! You will have to deal with it and eventually you can fix things but this is very hard and is a big mess. By checking your credit history you ensure that no one is applying for credit using your name.
  2. Reporting errors: Sometimes your lenders can make mistakes, or the credit bureau itself makes mistakes, so it is always a good idea to double check everything on your file to make sure it is actually yours, and that everything is where you expect it to be. If you see something out of the ordinary CHECK IT ASAP. Funny story on this: I advised my sister-in-law to get a credit report as I knew that she and my brother are planning on renting a new place. When she tried to get a credit report from Equifax and Transunion she could not. Their online system crapped out and gave her an error. I advised her to call them and fix it ASAP. She kind of delayed this decision and then when she desperately needed the report she got stuck! She eventually called them and it turned out that her name on the Bank account did not match the name on other accounts that she had with her Cell phone carrier resulting in 2 files for the same person! Her credit score could not be calculated! If she would have tried to go and get a credit card, or loan, or anything then she would have been most probably rejected on the spot! ain’t she glad she eventually listened! Well I know she fixed this information with ONE credit bureau. I hope she remembered to fix it with the SECOND one.. Yeah it’s two of them, and they don’t talk to each other I guess.

I will leave you with some words of wisdom:

Your credit score and history is your Financial Reputation.

Guard it!

This post has become really long and took me forever to write as last week I had my wisdom teeth removed and I was in pain, and on meds all week so could not write much.

In the next post we will go into credit cards in depth to talk about

  • The curse of the SIN card starting with a 9.
  • Secure and non-secure credit cards,
  • WHAT these evil credit card companies are not TELLING you.
  • The DEBT SNOWBALL.
  • Sometimes I use debt because I choose to use debt, or because I’m lazy