I have previously written about credit score basics here. I’d like to dig deeper on how it can actually impact your life.
Mortgages and Loans
The main use of your credit score and report is to determine if you are trustworthy, financially speaking. Financial institutions and credit card companies use it to assess your credit risk, i.e. their potential losses if you were to default.
Your credit score and history aren’t the only factors a lender will look at. Your income matters as well. It actually matters a great deal, as well as your debt ratio and credit utilization.
You’re filling in a quote for home insurance, and surprise, you’re asked for consent to check your credit score. You may not know it -until now- but all Canadian provinces except Newfoundland allow for insurers to do a soft credit check to calculate your insurance premiums.
Checking your credit score is very prevalent for home insurance, much less for auto or extended health insurance. It depends on the insurer.
Why would an insurer check your credit score? To determine what kind of risk insuring you represents. Insurance companies are not charities. Mitigating and sharing risk are part of their strategies.
Insurers are in the opinion that a customer with a bad or low credit score will be more prone to filing claims.
This is definitely questionable, but unfortunately this perception is here to stay.
However, in Canada, you can’t be denied coverage because of your credit score. Your credit score is only one of the myriad of factors insurers look at to determine your premiums and if they’ll insure you.
A landlord will want to ensure you can pay the rent. Again, a low or bad credit score makes you come across as financially irresponsible and as a default risk.
This is also questionable, but unfortunately this perception is also here to stay.
Credit checks for employment aren’t as prevalent in Canada as in the US, and it’s a good thing.
That being said, they’re part of the hiring process in industries like banking, finance and insurance. They’re also mandatory for civil servants of the federal government. They are legal in Canada.
If you work in a position that puts you in contact with company’s money, it’s normal for an employer to check your credit report. But if your job doesn’t give you access to the company’s money, there is no need for a credit check, in my opinion.
Also a credit check should be the last step in the hiring process, not the first one. You have the right to refuse a credit check. Unfortunately, an employer can refuse you a job, based on this.
Again, there is this perception that a lower or a bad credit score could push someone to steal or to be unethical.
There is No One-size Fits All…
Yet, credit scores are handled that way.
In the eyes of many people and entities, a credit score indicates the level of financial responsibility and maturity of an individual.
A credit score doesn’t tell the whole story about a person. Just because someone has a bad or low credit score doesn’t mean they’re a bad person or that they’re irresponsible.
Anyone can fall on hard times or have a life event impacting their finances, such as returning to school or divorcing.
Overall, credit checks haven’t become a common practice in Canada just yet. However, they are on the rise.
The best way to avoid unpleasant surprises is to manage your credit and finance well. It’s also good to monitor and check your credit report. Both Transunion and Equifax let you do it for free once a month.
If that fails, you can definitely work on improving your credit score and report. Pay your bills on time, make at least the minimum payment on your credit cards, avoid applying for too much credit, use a secured credit card to rebuild your credit.
In case of a tenancy or employment, honesty is the best policy. If you’ve fallen on hard times because of a divorce or an unexpected illness, these are mitigating circumstances.
Having a poor credit score isn’t a fatality in Canada.