In our second installment for Financial Literacy Month, we are going to address the basics for young adults in Canada heading out into the world about establishing and maintaining a good credit rating.
Your credit rating is a mysterious thing, if you let it be. However, all it is really is an accumulation of data by two large companies – Equifax, and Trans Union. These companies are competitors, and while many banks and creditors use both, there can be variations between your two separate credit bureaus with these companies.
We are going to assume for the purpose of this article that you are just starting out, and need to establish yourself, so let’s get started.
You won’t have a credit rating unless you provide information to one of the credit bureau companies -- they don't know you exist yet. However, this changes if someone does an inquiry on you – that means, if you fill out a credit application at Walmart, the information you provide on that form will be uploaded to one or both of the credit bureaus, and now you have a credit rating (although there won't be much there yet).
Who can do an inquiry? It can be a bank, a landlord, credit card company, or even a potential employer. When you fill out an application with these groups, there is often some small print at the bottom that tells you that your information will be sent to the bureaus.
A good way to establish a credit rating as well if you become a consignor or secondary card holder on a credit card, and your identity would be established there as well.
Remember, that any one who does an inquiry on your bureau will show up as well – make sure you don’t apply constantly for credit, as it will harm you in the long run.
What most people think of as their credit rating rests with their trade items – the items that report once a month showing your habits of payments – whether they are on time, you maintain a balance, and what your credit limits are. It’s often hard to get your first trade item (as you have no existing pattern of borrowing with any other trade items – ironic, isn't it?). However, you can establish a trade item is get a parent or spouse to add you as a consignor on an existing credit card or other trade item, or purchase a pre-paid credit card that reports to the bureau.
One option for a pre-paid credit card is Home Trust’s Visa. They are especially good because they report as a trade item. Their information page can be found here:
What Does My Credit Rating Look Like?
Your credit rating has a couple of sections – personal information, employment, trade items, registered items, judgments, bankruptcies, collection items, and inquiries. There may also be alerts or messages as well.
Things to avoid on your credit bureau are frequent address changes, trade items not paid on time, collection items, judgments, or frequent inquiries – be careful in your financial habits!
If you want to see an example of what a credit rating looks like, Trans Union has a guide book that has an overview of the sections and meanings:
People will often refer to your Credit Score, which is an abstract number assigned by Equifax or Trans Union. To understand how your credit score is calculated, we would refer you to this excellent article at My Money Coach’s website.
Get A Copy of Your Credit Bureau
The most important thing is to keep an eye on your credit bureau – mistakes can appear there, identities can be stolen, and items can be reported to the credit bureau without the consumer’s knowledge. Always ask for a copy every year from both credit bureaus for your records. You can do so for free at the following links:
A good credit bureau takes years to build, and moments to destroy. Understand that your actions have an impact on your ability down the road to buy a house, receive a car at a fair interest rate, or even become hired for a job. Get a copy of your credit bureau, and have a plan to build it and maintain it.
If you want more information about financial literacy, the Financial Consumer Agency of Canada has more resources available for Financial Literacy Month here:
As well, if you are in the Cambridge/Kitchener-Waterloo/Guelph area and would like to attend a free credit workshop where we cover this topic and more, as a service to the community, you can find information here:
If you have any questions about contracts, or would like more information to help you learn about your finances, feel free to contact myself. My direct line at Kingston Data and Credit is 226-444-5695.
Kingston Data and Credit
Kingston Data and Credit