Starting to See Holiday Bills Roll In? Understand and Protect Your Credit Score
Your credit score is the first thing a lender looks at when deciding if and at what interest rate they will lend you money, yet it is a mystery to many of us. Your credit bureau is a snapshot of your credit history and it gives lenders, employers, and even your landlord very detailed information about how you have used and treated credit in the past.
There are 2 reporting agencies in Canada, Equifax and TransUnion, and they both use a scale from 300-900. Your score is determined by 5 factors, each carrying a different weight: previous credit performance or on time payment (35%), current level of debt (30%), length of credit history (15%), pursuit of new credit (10%), and variety of credit (10%). The higher your credit score, the better.
Here are some basic steps to repairing and keeping your score high:
If You Can't Pay It All, Pay the Minimum - When you get an overwhelming bill it is tempting to just ignore it or pay a little bit late when you get that next pay cheque. This will seriously hurt your credit score. Pay the minimum on time and your credit score is protected.
Don't Max Out Your Credit Card or Line of Credit - Stay below 80% capacity to maintain credit and below 50%capacity to build credit. For example, if you have a $5,000 limit on your credit card never charge more than $4,000 (80%) against that card or it will actually have a negative effect on your credit score. If you are trying to build your credit, keep the balance under $2,500. If you charge the full limit of your credit card and but pay it off in full each month, it will still have a negative effect on your score because your balance was more than 80% of the limit.
Loyalty Does Pay When It Comes to Credit - Having 2 trade lines for a minimum of 2 years is best. Examples of trade lines are credit cards, car loans, RRSP loans, or personal loans. If you feel the urge to start cutting up your credit cards, make sure you always maintain 2 established trade lines. Playing the interest game and moving balances to new cards regularly will really hurt your score, not only because of all the requests for new credit on your bureau, but also because all of your trade lines will be new. Newer accounts will lower your average account age bringing down your score.
Saving $50 Today Hurts Your Score Tomorrow - Choose Your Credit Wisely - Resist those deals at the check-out that try to rope you into a new store credit card. Ideally you don't want to have any more than 6 - 8 hard inquiries per year showing on your credit bureau. Hard inquiries are applications for credit including a mortgage, car loan, credit card or other service. Soft inquiries are information requests such as you or your employer pulling your credit bureau. Hard inquiries impact your score (some types impact it more than others - ex. credit cards more than mortgage application) and soft inquiries do not.
Variety Is the Spice of Credit - Lenders look at your experience with a variety of types of credit. You may have a car loan payment automatically withdrawn from your bank account each month but how do you manage revolving credit? A combination of installment debt such as car loans, student loans, RRSP loans or personal loans with revolving debt such as a line of credit or credit cards actually helps to strengthen your score. One to two credit cards is best. Try to stay away from having more than 3.
Know Where You Stand - IT IS YOUR RESPONSIBILITY to ensure the information reported to the credit bureau about you is correct. Statistics show that 70% of credit bureaus contain some kind of error. And 26% of borrowers have had a credit request declined or are paying a higher interest rate due to an error on their credit bureau. Pull your own credit bureau once per year from both credit reporting agencies to check for accuracy. To obtain a copy of your Equifax bureau visit www.equifax.ca and for TransUnion, visit www.transunion.ca. Both companies will provide you with the information from your bureau for free, but charge a fee to include your score.
If you are looking at renewing your mortgage, purchasing, or moving and know you have credit issues, contact me right away. I help my clients understand and improve their credit scores. The sooner we start the process the sooner you can improve your credit!
Mortgage Tailors Inc.