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Credit score and your credit report

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My partner and I have always been competitive. When we met and started dating in university we compared grades and drinking skills. Now that live together we spar over things more mundane, like who's the better chef, gardener and cellphone-contract negotiator.

So when we recently ordered credit reports to aid in our apartment hunt, I was dismayed to learn that Don's credit score was higher than mine. He, of course, was thrilled to one-up me in a financial matter. (To find out the difference between your credit report and credit score, click here.)

Don has had more debt than I have, including a line of credit, a couple of credit cards and a hefty student loan, all of which he has since paid off. In contrast, I've had a couple of credit cards and a smaller student loan, which I have also paid off. Ever the perfectionist, I wondered, what did I do wrong?

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Don and I ordered our reports with scores from Equifax, instead of Canada's other main credit reporting agency, TransUnion, because Don's teachers' union offers a discount for Equifax. For about $18, we verified some personal information and received instant electronic credit reports and scores online. Without the discount, they cost $23.95. (A warning: Be careful not to sign up accidentally for an ongoing report, for which you will be charged monthly. I did without realizing it, and cancelled as soon as I received an e-mail giving me an automatic update on my score.) If you don't need to know your score, you can order a free report.

To find out how Don could have possibly beat me, I called Nadim Abdo, vice-president of client solutions at Equifax Canada.

I explained that even though our scores were both marked "excellent," Don's was higher than mine. "That's very good," he said, "but what are the scores?"

Don's is 846, I told him. And mine, well, it's only 783. I waited.

"That doesn't really make any difference," he said.

To help me understand the way credit scores work, Mr. Abdo explained the following:

-Equifax has a database of about 24 million Canadians. The company tracks how this population pays back all kinds of debt, including credit cards, lines of credit, bank loans and car loans. (The banks only started reporting mortgage information to Equifax a couple of years ago – soon that will be included too.)

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-The company does statistical analysis on a representative sample of the population over time to understand the probability of someone not paying a loan back or making late payments and then translates that probability into a score.

-A score represents a moment in time and can change based on your behaviour.

-Missed or late payments or lots of "maxed out" credit accounts will lower your score.

-The best way to increase your score is to pay back debts on time and consistently. Which means, of course, you need to first have some debt to repay.

-Scores typically range from 400 to 900, and good scores are typically 600 and higher; anything over 750 is considered excellent.

"Whether it's 750 or 850 doesn't really make a difference," Mr. Abdo told me. For an institution like a bank or credit union looking at your credit, anything over 700 is "a no-brainer." Because the makeup of your credit files is a bit different, your scores will also be a bit different, he said.

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I asked him if people should get a credit card – and use it smartly – in order to establish a good credit history. "We live in a country where you can't do much without having credit, and if you're being responsible about it and not overextending yourself, then it's always a good thing to have," he said.

Mr. Abdo also told me that credit scores are only one of several tools that credit agencies use to determine your credit-worthiness. "Your score is a check on your character," he said. "In this day and age, when we often can't meet face-to-face, how do you determine someone's character? We do it through looking at their past history and see how they've paid back debt."

I asked if Don's score could be higher because he's had more debt to pay back, but Mr. Abdo said in our case that shouldn't make a difference. He said you need at least an open and active credit file to establish a credit rating and after that, "it's the more the merrier, as long as you're being responsible and not overextending yourself."

With that, I thanked Mr. Abdo for his time, feeling relieved that I hadn't really "lost" this one to Don. Of course he still gloats, but our scores helped us impress a landlord who approved our application for the beautiful apartment we'll move into next month, so I'll put up with it for now.

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