Robin Harvey has no debts. The semi-retired journalist and former consumer reporter rents her home in Toronto, so she doesn’t have a mortgage. Her $20,000 line of credit has long been sitting unused. And the balance on her only credit card is paid off every month without fail.
But her Equifax credit score took an unexpected, 82-point beating in February, after a large credit-card purchase — even though, as usual, Harvey paid off the charge in full well ahead of the due date. The change brought her score from 820, which is considered “excellent” according to Equifax’ scale, to 738, which corresponds to “very good.” Credit scores in Canada range from a minimum of 300 to a maximum of 900.
Harvey was stumped. The email she received from Equifax alerting her to the points change mentioned that a “high credit balance” might negatively affect a credit score.
Harvey’s one-time charge was worth around $15,000, close to her $17,000 credit card limit.
“But that makes no sense,” Harvey told Global News, adding that she chose to use her CIBC credit card for the purchase to make the most her cash-back rebate.
Her mother had recently passed away, leaving her a small inheritance that she had decided to use to take care of a few, large one-time expenses.
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Harvey felt like she was caught in a catch-22. Why give consumers an incentive to use their credit cards to maximize points and then penalize them through a credit score drop for it?
“I have had my main CIBC account for 26 years — so that should keep my rating high,” she wrote via email.
Fortunately, the drop proved to be short-lived. Harvey’s score bounced back up in early March, when her credit report started to reflect her updated credit card balance of zero. Harvey said Equifax had initially told her the update would take up to 90 days.
Equifax declined to discuss the specifics of Harvey’s case, noting that it has a policy “not to work through the news media on specific consumer issues.”
In a written statement, Julie Kuzmic, director of consumer advocacy at Equifax Canada, noted that “there are many variables and different algorithms that go into calculating the value of an individual’s credit score.
“We encourage consumers to regularly check their credit reports with both credit bureaus to ensure the information is accurate and complete,” she wrote.
Canada’s other national credit bureau is TransUnion.
Old credit report errors
In fact, when Harvey took a closer look at her credit report after the credit score drop, she was also surprised to see that two reporting errors she had already flagged had not yet been fixed.
One was related to a $30,000 CIBC line of credit that Harvey said should have been closed in 2013. The other was an even older account she had already sought to cancel twice.
Harvey had opened the $10,000 line of credit with Royal Trust, now owned by RBC, in 1997 and had asked that the account be closed in 2006, she told Global News.
She said she originally found out about both mistakes in October 2017, when Equifax notified her of a data breach at its U.S. parent company that was later revealed to have affected some 8,000 Canadians along with more than 140 million people.
Harvey said she contacted CIBC by phone to ask them to update the information about her old credit line. She said the bank told her they had contacted Equifax.
In February 2019, CIBC confirmed once again to Harvey, this time in writing, that her credit line had been closed with no outstanding balance in 2013. The account did not appear in the latest copy of Harvey’s credit report viewed by Global News.
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Back in the fall of 2017, Harvey also got in touch with RBC about the Royal Trust error. Global News has viewed a copy of a letter from RBC dated October 2017, confirming that the account would be closed and adding that the bank would launch an investigation into why the credit line had not be cancelled upon Harvey’s initial request more than 10 years earlier.
The credit line now shows as closed, but remains on her record with a date of last activity reported as October 2017.
RBC did not provide comment in response to a Global News media inquiry about its handling of the Royal Trust credit line.
At Equifax, Kuzmic told Global News the company is “more than willing to investigate any possible errors, but the process requires following our corporate policies and privacy laws.”
Consumers can fill an online form on Equifax Canada’s website to dispute information on their credit report. The credit bureau says is will review the details provided by the consumer and might contact the institution that is the source of the information, if necessary.
“If the source informs us that the information is incorrect or incomplete, they will send Equifax updated information and we will change our file accordingly,” the company says on its website. It adds that consumers whose credit file is updated will automatically received a copy of their credit report showing the changes.
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The lesson for consumers
Harvey’s credit score swing is hardly surprising given her large credit purchase, according to John Ulzheimer, an independent, U.S.-based credit reporting expert who worked at Equifax and U.S. consumer credit score giant Fair Isaac Corp.
One of the variables credit scoring algorithms take into account is the “revolving utilization rate,” the relationship between your credit balance and your credit limit.
Harvey’s usual credit card balance as reflected on her Equifax reports ranged from zero to a few thousand dollars, according to evidence reviewed by Global News dating back to 2015.
But in February 2019, the $15,000 purchase suddenly caused the utilization rate on her card to shoot up to 88 per cent, Ulzheimer noted.
“That’s very high,” he said. “I would expect her score to drop considerably for a period of time.”
It is common for consumers to assume that, as long as they keep paying off their credit card in time, their credit score will remain unaffected, Ulzheimer said. But that assumption is wrong.
There is “empirically and demonstrably sound” evidence that higher utilization rates are “highly predictive” of consumer credit risk, he said. And that is simply what the algorithm reflects.
The credit score will bounce back up once the updated credit balance is transmitted to the credit bureau and the utilization rate drops, he explained.
“That is exactly the way the system is supposed to work,” he added.
Such short-lived swings usually bear no concrete consequences for consumers, as was the case with Harvey, and should not generally cause people to avoid putting large purchases on their credit card, Ulzheimer said.
The exception to that, though, can be found in cases in which consumers plan to apply for new credit in the near future. If you’re in the market for a new mortgage or auto loan, for example, you might want to avoid a sudden spike in your credit card balance, he said.
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Credit report errors, on the other hand, are not how the system is supposed to work.
But they have been a long-standing issue in the industry, Ulzheimer said.
A 2015 study by the U.S.’s Federal Trade Commission found that 25 per cent of consumers found errors on their credit reports that might affect their credit scores.
One of the issues is that it’s the consumers’ responsibility to make sure their credit report are accurate.
“You’d like there to be an easier and less obtrusive method to get your credit report corrected,” Ulzheimer said.
That’s tricky because credit bureaus can’t take consumers at their word and must rely on information from lenders and other information providers.
The companies and institutions in charge of providing credit information to credit bureaus, on the other hand, “do not have sufficient incentives to provide the most accurate data,” according to a report by the Brookings Institute, a U.S. think-tank.
The U.S. House of Congress has recently called for new legislation to impose tougher requirements on credit bureaus to address mistakes in consumer credit reports. But lawmakers have yet to come up with a convincing fix to the problem, Ulzheimer said.
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In Canada, consumers can ask for a free copy of their credit report from each credit bureau by mail. Experts generally advise checking your credit report on a regular basis and asking for copies from both Equifax and TransUnion, as they may have different information about you on file.
Lenders use your credit report to decide whether and how much to lend to you, as well as what interest rate to charge you. They may use their own formula to calculate a credit score based on your credit report information, instead of relying on the Equifax or TransUnion credit scores.
For her part, Harvey has been relying on Equifax monitoring service, which sends her regular updates about her credit file, including when no changes have been reported. Equifax Canada offered 12 months of free credit monitoring and identity theft protection to victims of the data breach, and renewed that offer for another 12 months in 2018.