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Understanding your credit

What's Involved In Getting Credit

Caring for your credit rating

Credit can be a valuable tool when it is part of an overall financial plan. It can make life more comfortable and long-term goals more attainable. We've prepared this information to help you understand the credit granting process so that you can establish a healthy credit rating.

What is a credit rating?

Your credit rating is an assessment of your ability to handle the financial burden of credit at a particular time. It is important to remember that your credit rating is dynamic. This means that it will change as your financial circumstances change.

While most financial institutions offer similar products and collect similar information during the approval process, credit granting policies will vary by product and from one credit grantor to the next.

Your overall credit rating is an important factor in determining the type and amount of credit you may be eligible to receive at any given time. That's why it's so important to establish and maintain the highest rating possible.

With a good credit rating, most applications or requests can be processed over the phone or the Internet, or at any TD Canada Trust branch. More complex applications may be referred to underwriters in one of our credit centres, and take a little longer to process.

How your credit rating is determined

Your credit history
Every time you apply for or receive credit, and every time you make or don't make a payment on time, you are building your credit history.

When you apply for credit, your financial institution has three ways to evaluate your credit history --

They review your past dealings with them;
They consider any new information you provide in your credit application;
They may contact a third party credit agency for a report on your overall credit history.

Credit agencies collect credit information from the companies that provide the credit to you. A strong credit record enhances your ability to get credit in the future. Records containing negative reports, such as overdue payments or nonpayments, could make it more difficult for you to borrow or get credit in the future.

Since your credit bureau report represents a summary of your activities with a variety of financial institutions and consumer companies, it is a good practice for you to request the details of your credit rating from the credit agencies periodically. This will help you to understand your rating and ensure that the information the credit agencies are using is correct.

To find out how to obtain a copy of your credit bureau report, you may contact the credit bureau agencies directly:

Equifax Canada
1-800-465-7166
consumer.relations@equifax.ca

Trans-Union Canada
1-877-713-3393 (Quebec only)
1-800-663-9980 (All other provinces)
marketing@tuc.ca

Your capacity to repay credit
You must be able to demonstrate the means to repay credit over the period of time in question. Your capacity to repay credit will change from time to time based on your income and your debt load.

Using mathematical formulas, we will help you determine your debt service ratio (DSR). (Or use our Total Credit Worksheet and Total Debt Service Ratio (TDS) tools.) Your DSR indicates the percentage of your current monthly income that goes toward paying off debt. If these calculations indicate that additional credit responsibilities may impact your ability to meet or manage your existing expenses, your credit application may be declined.

In this instance, a TD Canada Trust representative may be able to suggest ways to restructure your current debt load and recommend a short-term plan to help you get the things you want.

When you offer collateral as security in exchange for credit, the value of your collateral must be accurately determined. Since some assets fluctuate in value, or lose their value entirely over time, certain forms of collateral will be considered more valuable than others.

In general terms, assets such as real estate and guaranteed investments represent better forms of collateral than equity investments or vehicles, or in the case of small businesses, machinery or equipment.

Your overall relationship with TD Canada Trust
The objectivity of the credit granting process does not eliminate the importance of your one-to-one relationship with TD Canada Trust. In conjunction with the other credit granting factors, we will consider your borrowing history with us.

In the event that your credit application is not approved, we'll help you understand the reasons why. We can also recommend a strategy for improving your credit rating.

What to do if your application is not approved

The credit granting process can sometimes uncover aspects of your financial situation that you weren't aware of. Sometimes an application is declined due to a combination of marginally weak factors, not just one major factor. In cases like this, we can make suggestions that will improve your eligibility at a later time.

If you have a concern regarding the manner in which your application for credit was handled, please speak with the representative you have been working with. If your concern still remains, please refer to our "If you have a problem or concern" brochure, available at any branch, or online.

Reasons why your application may not have been approved

Recognizing that everyone's financial situation is unique, here are some common reasons why applications are often declined:

1. History of missed or neglected payments
This will likely lead to a lower rating on your credit bureau and could be of particular impact if previous creditors were forced to write off a loss.

2. Inadequate proof of income
A T4 slip or a pay stub is generally required as minimum proof of income. Depending on the type of income you earn (for example, if you are self-employed or a contracted employee) and the type of loan you require, more information may be requested.

3. Lack of employment or income stability
Based on your employment history, it must appear reasonable that your income will continue into the future.

4. Insufficient income
Your total income must support your current liabilities and living expenses plus the additional credit you are applying for. If your income doesn't meet the requirement, you may be able to have your application co-signed by a relative or friend who does meet the criteria and who will agree to be liable for the debt if you fail to make the payments.

5. Lack of collateral
Depending on the type and size of the credit requested, you may be required to provide collateral of sufficient value to support the debt. For example, a personal mortgage or Home Equity Secured Line of Credit requires the security of a residential property.

Maintaining a good credit history

You create your own credit rating through the way you manage your money. Below is a list of steps you can take that will help you maintain a good history and access to credit in the future.

1. Pay all bills on time
Failing to make your payments on time or missing them entirely can have a major impact on your ability to obtain credit. Setting up pre-authorized payments is a great way to ensure payments are made on a regular basis.

2. Pay minimum balances when you can't pay the entire amount
Making minimum payments, when the option is available, will help to maintain a strong credit rating.

3. If you have missed payments, get current and stay current
What matters most is your long-term pattern of behaviour. Paying your bills on time, over the long term, will result in a better credit rating. Avoid applying for credit too often. Frequent requests for credit may be interpreted as a sign that you have poor money management skills.

4. Establish a credit history
Responsible use of credit cards and loans will produce a better credit rating than no history at all. If you are just starting to establish your credit history, be cautious about opening too many new accounts. It's best to build your credit history gradually.

5. Keep your total debt load in check
Several small balances can quickly add up to an unmanageable situation. For example, avoid revolving debt on several credit cards at once. Two is ideal.

6. Avoid using credit to pay off credit
Consolidating balances from several credit cards into a lower-rate loan may be a smart move to reduce your interest charges and lower your payments so that you can keep them current, as long as you don't continue to increase your debt load. But simply making payments on one credit card with funds drawn, for example, from another credit card does not necessarily improve your overall rating because it can be seen as an attempt to avoid paying off your debt. It's much better to focus on paying off the credit you have.

7. Ask for help
If you find yourself getting in over your head, talk to your broker or your other creditors. Most creditors will help you to find a short-term solution to a problem if you contact them in advance.

*courtesy of TD Canada Trust

Last modified: 12/07/06