Get the facts, not the misconceptions.
With so much information floating around, we figured we'd give you the most common myths about credit scores so you can ensure you know just the facts!
Myth #1: Each person has only one credit score
In Canada, there are 2 credit reporting agencies; Equifax and TransUnion. These agencies create credit reports and scores for Canadian consumers based on the information that creditors supply to them. Unfortunately, not every creditor reports their information to each of these agencies. Creditors may also only update the credit agencies with your current information once a month - or less often in some cases. Consequently, Equifax and TransUnion may not have the same credit information about you, nor do they use the same software to calculate credit scores. This will mean that each of these agencies will generate a different credit score for you based on the information they have on record for you and how their software evaluates that information.
Myth #2: You can get your credit score for free once each year
You can get a free credit report each year from both Equifax and TransUnion, but you usually have to pay to find out your credit score. Several companies and organizations offer credit scores for free now as well, like Credit Karma (in exchange for your score they share your financial information with advertisers). When you apply for credit or open a new bank account, the banker will ask for permission to check your credit. At this time you can ask them what your credit score is. You can also ask them to tell you the strengths and weaknesses they see on your credit report if you want to improve your credit score.
Myth #3: Having a good job or earning good money will strengthen your credit score
Your occupation and income are not part of the credit scoring formula. Even if you are rich and famous, it doesn't matter to your credit score. Your occupation may or may not be reported to the credit reporting agencies when a creditor or lender requests a copy of your credit report and your income is never reported - there isn't even a place to put it on your credit report.
In short, having a stable job and a good income is very important to lenders, but it has nothing to do with your credit report or score. Your credit report shows only your payments history and credit behaviour, not your payment potential.
Myth #4: Spouses have the same credit score
The credit reporting system is similar to the driver's licensing system in that everyone has their own record. If the debt is only in your name and you are late with your payments, the late payments are only reflected on your credit report. However, if a debt is joint, then the late payment notation goes into both credit reports.
If you and your spouse are joint on all of your debts, then you may have similar credit scores, but it is still unlikely that your scores will be the same for several reasons:
- the length of time each of you have had credit is probably different
- you may have had debt in only your name within the last seven years, and;
- not all joint debts always report on each person's credit report
Myth #5: Your credit score is not affected by your ex-spouse when you get divorced
When a lender grants credit to you and your spouse based on a joint application, they are approving the loan credit application based on the fact that two people have promised to repay the debt. Just because you no longer live with your spouse or are divorced, does not change anything from a lender's point of view.
If you want to change who is responsible for a debt, you or your ex-spouse must either pay out the debt with a new loan or re-qualify for it in only one person's name. If you don't do this and leave the debt as it was, you remain fully liable for the repayment of that debt. If you thought that your ex-spouse was making payments on that debt, but the creditor informs you that they have stopped making payments, then it is your responsibility to continue those payments. If it took the creditor a while to track you down, your credit could be damaged by the missed payments that you didn't know about. Your credit score can be impacted by your ex-spouse if you still have any joint debts with them. A divorce only dissolves a marriage agreement, not a joint borrowing agreement.
Myth #6: Bankruptcy permanently ruins your credit
If you go bankrupt, a record of the bankruptcy will remain on your credit report for six to seven years depending on which province you live in. During that time, the bankruptcy notation will negatively impact your credit score and make it difficult to obtain credit. However, after six or seven years, the bankruptcy record and all records of bad debts (that are the same age) will usually be removed from your credit report, and this will allow you to get a fresh start.
Myth #7: Becoming debt-free will give you a perfect credit score
While becoming debt-free and staying that way is a fantastic way to live, it's not a silver bullet for your credit score. Your credit score is based on your credit behaviour and payment history, not just your debt amount. Not having any debt will help your credit score as long as you maintain at least one active credit account - like a credit card or a line of credit.
If you don't have active credit, the scoring system doesn't know how you currently handle your obligations. If you use one credit card occasionally and pay it off completely every time you get the bill, then the credit scoring system can see that you are using credit responsibly.
Knowing how the credit scoring and reporting systems work can help you make informed borrowing and credit decisions. However, credit scores can change monthly. There's no need to actively seek your credit score on an ongoing basis. Focus instead on managing your money, budget, and debt carefully; your score will take care of itself. Talk to your local branch or call our Member Solutions Centre if you have any questions. Our staff are here to give you advice and help get you on track!