Importance of Credit
People have become increasingly dependent on personal credit. Therefore it is essential that you understand the importance of credit reports, credit ratings and scores.
A credit report is a record of money that you have borrowed, repayment history and how much open credit is available. It consists of a list of how you have paid your creditors, any unpaid collection accounts, public record information such as a bankruptcy or judgments, and lastly any inquiries showing who is looking at your credit and when.
Creditors who have lent you money are required to rate each of your credit history items on a scale of 1 to 9. A rating of "1" means you pay your bills within 30 days of the due date. A rating of "9" means that you have failed to pay your bill.
- "I" means you were given credit on an installment basis, such as for a car loan, where you borrow money once and repay it in fixed amounts, on a regular basis, for a specific period of time until the loan is paid off.
- "O" means you have open credit such as a line of credit, where you borrow money, as needed, up to a certain limit and the total balance is due at the end of each period. This category may also include student loans, for which the money may not be owing until you are out of school.
- "R" means you have "revolving" credit, where you make regular payments in varying amounts depending on the balance of your account, and can then borrow more money up to your credit limit. Credit cards are a good example of "revolving" credit.
R0: Too new to rate; approved but not used.
R1: Pays (or paid) within 30 days of payment due date or not over one payment past due.
R2: 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.
R3: 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.
R4: Pays (or paid) in more than 90 days from payment due date, but not more than 120 days, or four payments past due.
R5: Account is at least 120 days overdue, but is not yet rated "9."
R6: This rating does not exist.
R7: Making regular payments through a special arrangement to settle your debts.
R8: Repossession (voluntary or involuntary return of merchandise).
R9: Bad debt; placed for collection; moved without giving a new address or bankruptcy.
Source: Equifax Canada
Your credit score is a numerical value that helps lenders decide how likely you are to repay your debts and plays a significant role when you apply for credit. The higher the score value, the better your credit.
Score values are calculated on a few variables including payment history, amount of total debt owed, how long you have used, had credit and managed it, how often you apply for new credit or take on new debt and the types of credit that you currently have.
Credit is a fragile thing. Credit reports, ratings and scores are important. Don't risk your credit as it is detrimental to your long term financial health and your future!