The credit reporting system is a fundamental part of the Canadian financial system. Without credit reporting, it would be much more difficult for banks and credit card companies to determine the credit-worthiness of potential and current customers.
Credit reports are used for all kinds of situations. For example, credit reports are typically used for decisions on auto loans, personal loans, mortgages, home equity loans, credit cards and retail card accounts. Your credit report is one kind of information source lenders may use to decide whether to approve your loan application or determine your interest rate.
So how does the credit reporting system work? Let’s start with the two national credit bureaus: TransUnion and Equifax.
Those companies collect consumer data from a variety of different sources— financial institutions, public records, and many others—and produce credit reports.
Credit reporting agencies gather various types of information, including your name, address, outstanding and closed loans, lines of credit, credit card balances and maximums, and loan payment records.
The credit reports the bureaus put together show the personal and financial information they have collected about you, including any public records (such as judgments), any companies who have pulled credit reports on you, and your employer(s)’ names and your addresses.
The credit reports are just part of your financial picture, though. The information the bureaus have collected about you is also used to determine credit scores that inform lenders how likely you are to be a higher or lower credit risk.
Credit scores draw on information found in credit reports to arrive at a three-digit number on scales that vary in range depending on who produces the score. The higher the three-digit number, the better your score. A higher score is typically interpreted as indicating you’re more likely to pay your loans on time, which may mean you are more likely to receive loan approvals and earn lower interest rates.