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Your Credit Rating

Borrowing money is a necessary evil in today’s world and unless you’ve been lucky enough to inherit a fortune or win a lottery, debt will accompany you for most, if not all, of your life.  A good credit rating is essential to qualify for credit when you need it.  Your credit history helps lenders determine whether or not you will manage your debts responsibly. 

A good credit score is required to borrow money in the form of loans, mortgages and lines of credit, to open credit card and utility accounts and to rent apartments.  In certain types of employment, particularly when duties involve handling money and/or personal information, a satisfactory credit rating may also be required.    

Credit information is collected by the credit bureau and in Canada this service is provided by two agencies, Equifax and TransUnion.  The information they gather includes bankruptcies and judgments, liens such as car loans, debts sent to collection agencies, personal credit including mortgages, loans and credit cards, mobile telephone accounts, NSF cheques and delinquent bank account details.  Credit bureau reports usually show credit activity for the past 6 years and longer in the case of some delinquent accounts.  

Your credit score is a rating based on how long your accounts have been open, how much you owe and your payment history.  Credit scores fall in the range of 300 to 900 with the higher numbers representing better credit.  Depending on the type of credit you are seeking a score of at least 600 to 650 is usually required and lenders often offer preferred rates to clients with high credit scores.  To obtain a copy of your credit report and score you can either call one or both of the credit agencies or request a copy online at a cost of approximately $20.00.  Although Equifax and TransUnion collect similar information there may be items that show on one report and not another.  It is recommended that you check your own credit annually to watch for signs of identity theft.

To maintain a good credit score always pay your bills on time and make at least the minimum payment.  If you think you won’t be able to make a payment, contact the lender right away to make arrangements to delay the payment.  If your past credit has been good, lenders are often willing to accept reduced payments during periods of unemployment or illness.  Never skip a payment even if an account is in dispute. 

If you have had credit problems, bring your payments up to date as soon as possible.  Late and missed payments over a shorter period of time will have less of a negative effect on your rating than late payments spread over months or years.  The time it takes your credit rating to recover will depend on the nature and duration of the delinquencies. 

Use your credit wisely.  Do not go over your credit limits and use only a percentage of your available credit.  The credit bureaus recommend that you try not to exceed 35% of your total available credit to ensure a good rating. 

The longer you have a credit account open and use it responsibly, the more it will improve your credit score.  If you transfer an older account to a new account with an introductory low rate or desirable features such as cash backs or travel points, the new account will be considered new credit.  Consider keeping the old account and using it occasionally.  Even if you have no reason to use credit for an extended period of time, charge small amounts to your cards regularly to keep your rating healthy.    

Don’t apply for credit unless you need it.  Frequent credit applications will negatively affect your credit score as lenders will suspect that you are urgently trying to get credit and may be living beyond your means.  If you are applying to different lenders for credit for a specific purpose such as a car loan or mortgage, multiple credit applications within a two-week period will be treated as a single inquiry. 

Lenders usually want to see more than one credit account and different types of credit products such as credit cards, loans and/or lines of credit, however, too many active accounts will negatively affect your rating. 

Having no credit history is also a road block when applying for credit because without a track record lenders will not know how you will handle your payments.  No credit may also be an indication that there were credit delinquencies in the past that have fallen off your record.  When applying for credit for the first time, a lender will consider your employment, job stability and income.  Credit references may be requested from utility providers or landlords.  To re-establish credit after credit problems, additional security in the form of a GIC or term deposit may be required until you have established a satisfactory payment history.   

For clients with low credit scores, borrowing rates will be considerably higher.  For example, five-year mortgage rates for responsible borrowers currently range from 2.59% to 2.84% whereas borrowers with damaged credit may pay as high as 7.00%.

Good credit requires a responsible attitude to debt and spending.  Review your budget regularly to make sure you are living within your means and pay your bills on time to ensure your borrowing power in the future. 

Lois Volk, Invis, loisvolk@invis.ca