How Do Credit Reporting Agencies Work?

There are ways you can repair your credit score, however it might help to also understand how credit reporting agencies collect the information in the first place.

Very few people actually understand how credit reporting works.  There are two very large national credit bureau companies in Canada – Equifax and Trans Union. Both are in fact American companies but they offer credit reporting services to Canadian lenders.

Did you know that the credit reporting agencies are for profit companies?  Many people think they are government run programs and nothing could be further from the truth.  The agencies exist to provide information to credit granters – banks, credit card companies, and other lenders.  These lenders pay annual fees to obtain access to your credit history. Credit reporting agencies are regulated federally under the Privacy Act and provincially under the Ontario Consumer Reporting Act. This is important because they are collecting private information about your credit history and reporting it to their member agencies.

How Credit Bureaus Work

How Credit Bureaus WorkCredit agencies collect their data from lenders and public records. Lenders choose which data to report and to which agency and which agency to obtain a credit report from when you apply for a loan. Some may even use both bureaus to be sure they have a complete picture of your credit history.

Each month the member companies report your account activity to the credit reporting bureau.  The credit agencies compile this data and produce your report.  The agencies themselves assume no responsibility for the accuracy of the information – they rely solely on the companies that report your activity. That is why periodically checking the accuracy of your own credit report is important.

The credit bureaus also collect information from public records. This includes judgements, insolvencies and liens. If you have filed for bankruptcy, entered into a debt management program including a consumer proposal or debt management plan, it will appear on your credit report.

It is interesting to note that most mortgages in Canada are NOT reported on your credit report. This is because lenders do not want information about where you hold your mortgage disclosed to prevent competitors from soliciting you to switch your mortgage to them.

The only accounts that appear on your credit report are the accounts from member companies.  Your dentist is probably not a member of a credit reporting agency so if you owe your dentist money, the debt won’t appear on your credit report.  Neither is your landlord, or property taxes.

All Canadians who have ever applied for a loan or credit have a file with one or perhaps both of the credit bureaus.

How Your History Is Rated

You may have heard people say they have triple A credit or A1 credit, or perfect credit.  None of those statements mean anything.

Each of your accounts is rated based on your payment history from 1 to 9.  A one signifies you made you required payment that month, 2 means you are a month late, 3 means you are two months late….  7,8 and 9 are used to reflect the legal status of your account if it has gone to collections or is being dealt with outside the normal course of business including any forms of debt settlement you participated in.

Broadly, some the standard ratings are as follows:
0: Too new to rate or unused
1: Paid on time, not overdue
2: One payment dilinquent
3: Two months delinquent
4: Three payments delinquent
5: Account is at least 120 days overdue, but is not yet in collection or deemed a bad debt (# 9)
6: This rating is not used
7: Making regular payments through a credit counselling Debt Management Plan or Consumer Proposal arrangement to settle your debts.
8: Asset was repossessed.
9: Account is in collection or written off as bad debt or account is in bankruptcy.

From all of this data, the credit bureau provides a ‘credit score’ that ranges from 300 to 900 although the actual score can differ by credit agency. Credit scores are calculated based on 5 credit score components or factors. The consumer score you see when you obtain a credit report may be different than the one seen by your lender as a member agency.

We recommend that if you are applying for credit, or are looking to improve your credit score, you should review your credit report from both major agencies. Although both credit burueas work in the same basic way, each agency does have different data and different scores. Now that you know how they work, you can better understand how to correct any errors and take action to improve your report if you need to.

Category: Debt Management | Tagged in: ,

Jan 16, 2014

About Ted Michalos

Ted is a Licensed Insolvency Trustee and Chartered Accountant with more than 20 years experience. He is a co-founder of Hoyes, Michalos & Associates Inc., one of the largest personal insolvency practices in Canada focused on helping individuals deal with their debt.

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