In my last article, I looked at how do you update or dispute information on your credit report. However, it’s tough to spot an error on your credit report, especially if you don’t know how to read it in the first place. Being able to read and understand your credit report is a vital skill to have. If you don’t know how to read it, you won’t be able to spot any potential mistakes. This can hinder your ability to obtain credit with the most favourable terms and conditions.
Let’s take a look at how to read and understand your credit report.
Reading Your Credit Report
There are two major credit reporting agencies: Equifax and TransUnion. Each has its own credit report. You can request one for free from each every 12 months. It’s a good idea to do that because one may be different than the other. For example, some lenders only report to one credit reporting agency. Likewise, one credit report may have an error, while the other doesn’t. Although the credit report format is slightly different, they both convey similar information.
At the top of your credit report, you’ll find personal information to identify yourself, such as your name, any aliases you go by, date of birth and social insurance number. Below that, you’ll find your address history and employment history. You’ll want to review to make sure it’s accurate.
A section you’ll want to pay extra attention to is any recent credit inquiries. If there are any creditors you don’t recognize, you’ll want to inquire with them. This could be a sign of identity theft – when someone steals your identity and tries to fraudulently apply for credit in your name.
Understanding Debt Ratings
There are so many different types of credit – car loan, credit card, line of credit, student loan and mortgage, to name a few. To make it easier to keep track, Equifax and Transunion have assigned the credit types with debt ratings. The codes are made up of two parts: a letter and a number.
The letter stands for the type of credit it represents.
I is for “installment loans” like car loans. An installment loan is any money borrowed as a lump sum for a specific timeframe to be repaid in fixed amounts or installments on a regular basis until the loan is repaid.
M is for “mortgage loans” like the mortgage on the home your family lives in. A mortgage is a lot like an installment loan. You typically spread the repayment over 25 years, making regular payments on a monthly basis.
O is for “open status credit” like lines of credit. You can borrow money as you need it up to your credit limit. You only need to pay interest on the amount that you borrow. Often you make interest-only payments to keep your account in good standing.
R is for “revolving or recurring credit” like your credit cards. This is the most common type of credit. Revolving credit is a lot like open status credit. You’re required to make a minimum payment based on the amount you borrow. Your minimum payment is usually a flat dollar amount or a percent of your outstanding balance.
Your debt rating also comes with a number. It can be between 1 (the best rating) and 9 (the worst rating to have). If you have a 1 rating on all your credit types, it will go a long way to boosting your credit score. If your credit score is higher than 1 too many credit items, it could negatively impact your credit score.
0 – Too recent/new for a rating; or approved, but not yet used
1 – Paid within 30 days of billing; pays as agreed.
2 – Payment 31-59 days late.
3 – Payment 60-89 days late.
4 – Payment 90-119 days late.
5 – Payment more than 120 days late, but not yet rated “9.”
6 – N/A
7 – You make regular payments under a special arrangement, such as a consolidating loan, with a credit counselling agency.
8 – The property has been repossessed
9 – The debt has been written off as “bad debt” and/or it has been sent to a collection agency; or you’ve filed for personal bankruptcy.
Let’s put them together. If you had a debt rating of R1, it means you have a credit card where you always make at least the minimum payment on time. However, if you have a M3 rating, it means that you have a mortgage where you’ve made a payment at least 60 to 89 days late.
There you have it. How to read and understand your credit report in a nutshell!
Need some help understanding your credit report? Contact our offices today. We’re happy to walk you through it.
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About the Author
Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Finance Journalist, Money Coach and Speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail, Financial Post and MoneySense. Connect with Sean on LinkedIn, Twitter, Facebook and Instagram.