2-01: The Down Low on Credit Scores
Today, we’re talking about credit reporting and credit scores.
For most of us, knowing what goes into a credit score and how to make it acceptable to landlords, employers, cell phone companies, and lending institutions is necessary to get by in today’s world.
But just because it’s necessary doesn’t mean it’s right. The entire system of credit reporting and scoring…indeed, the whole concept of “credit worthiness” is skewed in favour of the people who own and profit from housing, utilities, and financial services.
Can you look up how often a landlord responds to repair requests or evicts people to renovate and jack up rents? Is there a publicly available report you can pull on an employer to see if they have a history of firing people just before their 90 day probation period is over or purposefully scheduling people just under the threshold that makes them eligible for benefits?
Of course not. Credit histories are a tool for projecting how profitable you might be as a tenant, employee, or borrower. Accountability and transparency is, apparently, a one-way street.
So let’s reframe your credit history as a rewards card for how much money you make for other people.
How Credit Reporting and Scoring Work
With that in mind, here’s what you need to know:
There are two credit bureaus in Canada: Transunion and Equifax. These companies receive massive amounts of information from lenders about what you’ve borrowed in the past and how you’ve managed it, including information about late bill payments, consumer proposals, and bankruptcy filings.
Then they apply their privately owned formula to all that history, assign each person a score based on their past behaviour, and sell that data for billions of dollars a year back to lenders, landlords, cell phone companies, and employers who use it to decide whether to lend you money (and at what interest rate), and whether you get the apartment, the cell phone plan, or the job you’re applying for.
Your credit score is a number between 300 and 900. High scores are “good”, and low scores are “bad”. We’re told (generally) that does go into your score includes:
How many times you’ve paid your loans or cell phone bills late, how late those payments were, and if an account has ever been sent to collections, or if you’ve been through a structured repayment program, submitted a consumer proposal, or declared bankruptcy. This history makes up 35% of your overall score
How much credit you have access to, and how much of it you’re using. Using none of it is bad for your score, and so is using more than 30%. If you have a credit card with a limit of $5,000, put at least $50 every month, and try never let the balance go above $1,500. This is worth 30% of your score
How long you’ve had some kind of credit account. The longer you’ve used credit the better, so start early. It’s worth 15% of your score
If you have a mix of revolving, installment, mortgage, and open credit. For some reason, only one kind of credit is bad, but more than one kind is good. 10% of your score depends on this mix
How often your credit report is checked by someone trying to sell you credit, worth the last 10% of your score
In fact, the best way to increase your credit score is to not be poor and not have anything bad happen to you. The second best way is to get a credit card the minute you turn 18, use it and pay it off every month (but never more than 30% of the balance), and never, ever miss a payment on any bill ever, even if you have to choose between paying your credit card and keeping a roof over your head.
Is It “Just Math”?
The promise of the credit reporting and scoring system is that it provides an objective, evidence-based measure of how good you are with credit, and therefore if you deserve to get a loan (or rent an apartment, get a cell phone, or land a job). Feed your history into the credit machine and it spits out a score. It’s just math, right?
Of course not. The evidence is cherry picked. It doesn’t include rent payments you’ve made for years or bills that are paid on time but aren’t reported to the credit bureau. It certainly doesn’t factor in the people who have chosen never to borrow money and gotten by just fine without it or the people who chose survival over keeping their credit history squeaky clean.
Nobody at the credit bureau knows or cares that you were kicked off of disability, your partner died, or you have to drive three hours to the hospital every other week for a treatment you can’t get at home. The formula that generates a number from your behaviour has a huge impact on your life…but it has nothing to do with your worthiness.
It has everything to do with who can make money off of you.