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Tips on Keeping a Sparkling Credit ReportBy Julie Vincent of HLC Home Loans Canada Every person who has ever applied for credit has a credit record, whether or not they have been successful at acquiring that credit. In Canada, two agencies track credit records; Equifax and TransUnion. These agencies also track applications for credit, payment histories, amounts and location of debts, bankruptcies, repayment plans, work history, address history, names and AKA (also known as) and even marriage history. All lending institutions make use of credit records in their lending decisions, so a clean credit history is a must. There is no magic to keeping your record clean and there are several ways to really improve your record. First and foremost, pay at least your minimum balances every month and pay them on time. Secondly, do not have more credit than you need. And finally, never rack up your cards to their maximums. If you always pay at least the minimum balance on time, you’ll always have a “paid up to date” notation on your bureau. Paying your cards off on time every month makes your credit record sparkle and saves you hundreds of dollars in interest costs. Other tricks are to never spend more than half of the available credit on any of your cards and to never have more than 50 percent of your annual salary available in unsecured credit card limits (unsecured credit is not attached to an asset, such as a home). For example, if your gross annual salary is $65,000, have no more than $32,500 available in credit cards and never use more than half of that amount unless you are certain you can pay the debt at the end of the month. Incidentally, the annual interest cost on $16,250, using a simple interest calculation, and an interest rate of 18.9 percent is about $3100. That’s three weeks in Mexico, or 2.5 months of mortgage payments, for comparison. It is also almost a year’s worth of university tuition. Every month a balance remains, you’re paying interest plus interest on interest! Credit worthiness is denoted by a statistical measurement called the BEACON or FICO score on your credit report. The higher this score, the better you are at managing your debt. The lowest score is 400 and the highest is 900. Most people score between 620 and 750. Lenders start feeling nervous when scores fall below 620 and scores below 600 make it increasingly difficult to acquire credit. Certain things will knock a score down and some will hit it really hard. Any application you make for credit will have a small impact on your score. Having more than three forms of credit also brings a score down, although if that credit is well managed, the impact can be slight. Late payments have a much greater downward effect on a score and the later the payment, the more the score goes down. The effect of late payments is magnified if there is more than one card being paid late. Collections and bankruptcies have a very negative effect on a bureau and will affect it for as many as seven years. One way to avoid credit ‘hits’ is to ignore those “You’ve Been Approved” solicitations that come in the mail. You can take it that you’re a desirable customer if you’re getting those offers, but don’t sign up for them. In respect to credit and the health of your record, less is more. Also, don’t credit-seek. If you need credit, do your research, decide on the product you want and make one application. But first, make sure you really need that credit. There are two common notations on a credit record, being “R” and “I” scores. “R” refers to revolving credit, like credit cards and lines of credit. “I” refers to installment credit types, which include loans and car payments. An “O” notation refers to a new credit source that has not yet been activated. The “Rs” and “Is” should always be followed by a “1”. If there is anything other following those letters, you should be concerned and a lender will always be. A “2” behind the letter means your payment is 30 days past due; a “3” means 60 days and so on. There is no “6”, “7” or “8” but there is a “9” and that means serious trouble. An “R9” or an “I9” means that your item has gone to a collection agency. A bunch of “9s” usually means a person is currently or has been recently bankrupt. Not a good scene. How can you fix a sub-par rating? Always pay your bills on time and pay them off as a rule. If you are having trouble managing your credit and debt, get help. There are many resources for advice and help in this area. Start with your bank or your financial planner, but don’t wait. If you have never seen your credit record or if you haven’t seen it for more than a year, you should get a copy of it. Go to www.equifax.ca and look for Consumer Reports in the menu. You can either order your report on line by credit card and get it immediately, or print off the request and post it for the cost of a stamp. When you get your report, if you have questions about it, ask your lender or financial advisor to go over it with you. You may find discrepancies or errors, which should be dealt with as soon as possible. Items that make no sense could mean there has been a theft of your identity and should be cleared up immediately. A clean credit record can be your ticket to a solid financial life. Make it your plan to always keep on top of your credit and debt payments. When it comes time to purchase a home or a car or to get a secured line of credit, you’ll be very glad you have taken care of business. Julie is mortgage specialist with six years experience & 20 years business development, marketing & public relations experience. Her specialty is new buyers. |