Whether your goal is to establish a good credit history, pay off your debt or boost your credit score, there are many aspects of credit ratings that are misunderstood by Canadians. More importantly, sometimes the actions we think are correct in managing our credit ratings and debts can give the wrong outcome for our overall financial health. Read on to learn some debt expert tips and insights, credit mistakes not to make, and how to better manage your debt.
What’s in a Credit Score?
Canada has two main credit bureaus: Equifax and TransUnion. These are private companies that store and share the information they have collected from your Canadian creditors about how you use your credit.
When you apply for or borrow for the first time, your credit report is created – this is a summary of your credit history. In addition to personal information such as your date of birth, address and employment history, your credit report may contain information such as:
- Credit you use and facts about your accounts such as balances and payment habits.
- Inquiries from lenders and others who have requested your credit report.
- Remarks including consumer statements and fraud alerts.
Your credit score is calculated using a formula based on information in your credit report – it is a number ranging from 300 to 900. Your credit score changes as your report is updated; in general it takes from 30 to 90 days for information in your credit report to be updated.
Credit score ’points’ are accumulated or lost depending on whether you demonstrate actions of using your credit responsibly, or are having trouble managing your credit. Because credit bureaus don’t share the methods they use to calculate scores and don’t necessarily reflect the exact same information, it’s impossible to know the exact “number” impact on your credit score of actions you may take. Furthermore, banks and other lenders set their own policies and guidelines on how they use and even “weigh” certain components of your credit score.
TIP: It’s considered a “best practice” to review your credit history at least once a year. Finding errors on your credit history/report are common. Keep an eye out and if you do spot an inaccuracy be sure to follow up with the reporting credit bureau to have it corrected.
Tips to Support a “Good” Credit Score
How you use your credit and your personal spending habits make up the bulk of your credit history, which can have the biggest impact on your credit score. Here are some general tips help support your credit score:
Credit History Timeline
- Generally lenders like to know you’ve been able to manage credit accounts over time, so having accounts with a longer/established history of positive behaviour can reflect well on credit scores.
- Your score can be lower if you only have accounts that are quite new.
Treat All Accounts as Important
- Don’t skip payments – always make all your payments on time, every time!
- Don’t ignore “small” bills like cellphone and internet plans. Even though they’re not traditional “credit” accounts they can show in your credit report – and they can still impact your score significantly if left unpaid.
- Connect with your lender right away if you think you’ll have difficulty making a payment.
Watch Your Balances
- Try to keep your balance to less than half (some professionals even recommend as low as 30%) of your available credit.
- Avoid going over your borrowing limit – not only will exceeding your authorized limit impact your credit score, but you’ll often be charged fees for doing so.
- Even if you pay your balance in full before the due date, using a lot of your available credit can be a potential red flag to lenders.
TIP: The ideal way (for you and your credit score) to use credit such as a credit card would be to pay the balance off in full right away. If that’s not possible then at least aim to always pay more than the minimum payment required each month. Relying on minimum monthly payments alone can stretch debt repayment out for years, even on just a modest balance.
Debt and Credit Cautions
It’s important to strike a balance in managing cross-over areas of debt and credit. Many debt help experts suggest caution in areas such as:
Taking on Debt to Improve Your Credit Score
Having some diversity in credit products can be of benefit to your credit score (i.e. a credit card, a vehicle loan and a line of credit compared with a credit card only) – but be incredibly careful with balancing “looking good on paper” to what is good (and manageable) for you personally.
- Never take on more debt that you can afford to pay back.
- Avoid the temptation to use extra credit you have access to if you don’t need it.
Also bear in mind that at some point having many different credit accounts can end up negatively impacting your credit score.
TIP: It is generally recommended to limit your credit seeking applications/credit checks. “Too many” credit checks or inquiries on your credit report can indicate to lenders that you are urgently seeking credit and could be overextending yourself financially.
Focusing on Your Credit Rating
Always be aware that what’s best for your cash-flow and personal finances isn’t necessarily “best” for your credit score. Credit scores were designed as a measure for lenders to gauge customer profitability. People with zero debts who have savings in their bank accounts may have a lower credit score than someone who is juggling many debts with minimum payments on a maxxed-out budget.
- Your credit score alone should never be considered an accurate measure of your overall financial health.
- For most people, aiming to be debt-free should be a top priority, and if you’re able to be debt-free and accumulate savings that’s even better.
TIP: Struggling with debt to maintain a credit rating doesn’t generally benefit you. The unexpected can (and often does) happen – don’t rely on “good credit” to get you through. It is highly recommended to focus on getting out of debt and accumulating emergency savings instead of planning to use credit to manage a cash-crunch.
Managing Credit Checks with a Lower Credit Score
If you are dealing with a credit-check situation and worry that your credit score will be a problem, consider additional information you can offer to demonstrate your suitability – particularly in situations such as housing applications or other more personal transactions:
- Being honest and upfront about the context of your credit situation.
- Having a debt-to-income ratio that shows you shouldn’t have problems meeting payment terms.
- Providing solid references.
- Showing stable employment history and/or savings balances.
- Making an offer to pay in advance.
If you are planning to borrow in the near future (i.e. for a new mortgage), having a good Canadian credit history can be helpful in helping you get ‘best rates’. But know that even if your credit history is less than ideal, with the right actions your score can change dramatically in just a year or two.
- Transactions such as late or missed payments may show for 6 years, but there is virtually nothing you can do that would permanently “ruin” your credit score.
- Getting new credit at ‘best rates’ is often possible even within a year or two after a personal bankruptcy filing (which is removed from credit history 6 years following your ‘exit’ from bankruptcy).
TIP: Be extremely cautious in dealing with companies that offer instant credit repair services. It simply takes time and the right actions to improve your credit score; a quick fix for your credit rating is generally a misleading promise.
Clearing Debt to Improve Credit Score
Most people want to support their credit rating so they can borrow, and the bottom line is that the sooner you can become debt-free, the more opportunity and resources you’ll have, whether you want to accumulate savings for financial goals like buying a home or retiring, or simply feeling more in charge and in control of your financial affairs.
Although it may first seem counter-productive to undertake a debt solution that has a negative credit score impact, a short-term reduction often has better benefits in the long-term. Consider this:
- A non-borrowing consolidation with a Consumer Proposal allows you to combine virtually all types of debt AND cut debt repayment, without interest charges or borrowing costs. You settle all your debt in full, at far less cost.
- Your credit score will reset with a financial fresh start when your Consumer Proposal is over, leaving you free to create credit history with “ideal” payment history and habits.
- 65% of participants in a recent BC Consumer Debt Study said their experience working with a Licensed Insolvency Trustee allowed them to improve their budgeting and/or saving skills, as well as increasing their confidence in day-to-day financial management. More than half said they now have a better understanding about credit and borrowing.
Canadians can get professional assistance and advice about debt by connecting with a Licensed Insolvency Trustee in their province. Licensed Insolvency Trustees are the only professionals fully endorsed, empowered and approved by the government to help Canadians manage their debts.
At Sands & Associates we offer BC residents:
- Confidential debt assessments (these can even be done via phone or video conferencing, so there is no need to leave the comfort or convenience of home).
- Our commitment to providing non-judgmental support and resources.
Connecting with a Licensed Insolvency Trustee allows you an opportunity to get one-on-one advice and information about your specific situation and potential solutions. You are under no obligation to move forward, and of course there is no impact to your credit history when you meet with us to get advice.
Get a plan to be debt-free in less than an hour – connect with a caring BC debt expert today. Book your free, non-judgmental debt consultation now.