Credit Check

What is a credit check?

Credit cards, lines of credit, loans, and mortgages are all forms of credit. When you go to a lender (like a bank, credit union, or credit card company) to ask for new credit, they’ll do a credit check.

A credit check is when a lender requests a copy of your credit report from one of Canada’s two main credit bureaus: Equifax and TransUnion.

The credit report is a summary of your credit history. It holds information about credit accounts you hold or have held in the past, and how you’ve managed them.

Lenders use these reports help them decide if it’s safe to offer you credit or too risky. Credit reports that show frequent missed payments or debts in collection don’t look attractive to a lender. A history of on-time payments shows them you manage credit responsibly.

Your credit report includes a credit score. The credit score is a 3-digit number that represents how good your credit is. The higher the number, the better.

A good credit score is anywhere between 660 and 900; the high end of the range is considered excellent.

The number that’s “good enough” depends on the lender and the credit that you’re applying for.

One more important thing about credit checks:

There are two types: a hard check and a soft check.

A hard check is when a lender requests your credit report before offering you a new credit account. Hard checks have a temporary negative effect on your credit score. Many hard checks in a brief period is a red flag for lenders. They might think you’re desperate for credit and therefore too great a risk.

Usually, multiple hard checks for the same reason within a short timeframe only count as one. For example, while you’re shopping around for a mortgage or a car loan.

A soft credit check is when you request your own credit report, or someone else requests your report for reasons other than giving you new credit. Soft credit checks do not affect your credit score.

There is no penalty for requesting your own credit report, but you usually have to pay a small fee. Checking your credit report shows you where you stand before you seek a new loan or credit card.

The RCMP recommends checking your credit report regularly as a defence against identity theft. If someone applied for credit in your name, it would show up on your report.

Employers, landlords and insurance companies may all ask if they can do a soft credit check. For more information about insurance companies and credit checks, keep reading.

What is included in a credit report?

Credit reports include a certain amount of personal information, including:

• Name
• Birthdate
• Current and previous home addresses
• Identification numbers including SIN, driver’s license, and passport

The credit report also shows your employment history. The meat of the credit report is the financial information, which includes:

• Current and past credit accounts and their balances (credit cards, lines of credit, loans, etc.)
• Your payment history, including bounced cheques and failed payments due to insufficient funds
• Past bankruptcies
• Debts that have been sent to collection agencies
• Hard credit checks during the past 36 months

Do insurance companies check credit scores?

Insurance companies sometimes ask for permission to do a credit check before they issue a new policy. Insurance is regulated at the provincial level, so rules vary from province to province.

Newfoundland and Labrador forbids insurers from using credit scores during the application process. In Ontario, auto insurers can’t use credit scores, but home and other insurers may.

In the other provinces, insurers may check your credit score. They need your consent to do so, except in Nova Scotia, Prince Edward Island, and Saskatchewan. In these provinces, insurers only need to inform you that they’re doing the check.

Insurance industry research found a correlation between credit scores and claims. People with high credit scores tend to make fewer claims than those with low scores.

Regulations don’t allow insurers to deny someone insurance based on a low credit score. Instead, they often offer lower premiums to insureds with good credit, based upon those insureds statistically lower likelihood of making claims. Some insurers require a credit check before they provide a quote.

At Square One, we ask for permission to run a soft credit check during the quote process.

The important points

• A credit check is when a lender or other party requests a copy of your credit history from one of Canada’s credit reporting bureaus.

• Your credit history includes all your past credit accounts (loans, credit cards, mortgages, lines of credit, etc.) and how you used them.

• Insurance providers sometimes ask for permission to run a soft credit cheque during the application process.

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