For many medical students, the path to adulthood includes getting your own credit card (not a supplementary one from your parents), and possibly a line of credit, too. If you’ve already got those in place, that’s great – you’re starting to establish your own credit.
The next step is to make sure you’re showing that you’re a good borrower. That means being mindful of your credit: paying bills on time and not over-borrowing. This can help you establish good credit now so that you are on the right track later.
Here are some things you need to know.
What is a credit report?
Whenever you apply for credit, whether it’s a credit card, a loan or line of credit, the lender (or the company lending you money) will look at your credit report from one of Canada’s big credit bureaus — Equifax or TransUnion. This helps the lender decide whether to lend you money, how much they can lend you, and how much interest they will charge.
Your credit report includes:
- your personal information, like your name and address, and how long you have lived at that address
- your employment information, if applicable
- a list of any accounts you have, such as credit cards and student loans
- the limits on those accounts
- the amount owing on each account
- how long you have had each account; and
- information on how and when your credit report was looked at
Every time you apply for credit and provide personal information, those details go not only to the lender, but also to the credit bureaus.
Your credit report information is updated on an ongoing basis by the lenders you deal with, who inform the credit bureaus when there are changes to your account limits, balances owing and payment history.
Mistakes do happen, so be sure to check your credit report for any errors once a year. You can request a free report by mail from Equifax and TransUnion or pay a fee for instant access online at Equifax’s and TransUnion’s websites.
There are a few things to know when asking for a report. Whenever your credit report is requested by someone other than you, the request is recorded as either a “hard inquiry” or “soft inquiry.” Hard inquiries are made when you sign up for a new credit card or loan, and these will shave several points off your overall credit score (see below) for a year. So be careful how often you apply for new credit. A soft inquiry, or one that does not impact your score, happens when you check your own credit report.
What is a credit score?
On your credit report, there will be an overall score. These are calculated using algorithms — no human intervention is involved.1 Your credit score is represented by a number ranging from 300 to 900, which lenders use to evaluate how reliable of a borrower you might be.
What impacts your credit score?
- Making the minimum payment (or more) on time: If you have accounts that are not paid on time, or any accounts in collection, that would lower your score. Always make the minimum payment on time.
- Making sure the amount owed is low: If you spend $900 on a card with a limit of $1,000, your “credit utilization ratio” is high, which would lower your score.
- Building a good credit history: If you own accounts for a longer period of time, that would increase your score.
- Not taking out too many credit cards: If you take out too many credit cards or lines of credit (or if you apply for too much credit), this will hurt your score.
- Getting a healthy credit mix: If you have a healthy mix of credit types (e.g., student loans, mortgages, credit cards), this would help your score.
What are the benefits of having good credit?
- Loan and credit approval: With a higher credit score, you can be approved for mortgages, loans or lines of credit more easily, and sometimes at a lower rate — which means less money owed over time on the money you borrowed.
- Approval for higher limits: When lenders know you pay your bills on time, they’ll give you higher credit limits as well.
Credit scores don’t have to be a mystery, and good credit is an attainable goal. In general, negative information stays on your account for about six years while positive information stays longer.
By checking your credit report annually to ensure accuracy, you can reduce harmful marks against your score. If you see something that doesn’t look right, contact the credit bureaus.
When you understand how credit scores work, you can set yourself up for a bright financial future when you begin to practise.
1 There are online credit monitoring tools, such as CreditView, that give you access to your credit score for free, offered through your financial institution.