Rick Bossom, AMP

It's Your Credit....

Credit ratings are very important to our financial well being. If you don't read further than this, please check your own credit ratings from both Equifax and Trans Union to ensure all information is correct. You are entitled to view your credit report anytime without charge. It just takes a phone call or mail in request.

There are 3 main areas a lender will look at when you apply for credit, (loans, credit cards, mortgages). The amount of debt you can reasonably handle given your income, your employment history, and your credit rating. Our credit rating isn't a mysterious person tracking every purchase we make; it is our own financial track record, one that should make acquiring any type of credit fast and easy. Why then, do we gulp as our credit is checked? Are we guilty of something; or is it just a matter of not understanding how credit reporting works?
 

35% of your credit rating is based on your payment history

There are two main credit reporting agencies in Canada: Equifax and Trans Union. Both have online access to view your credit report and score for a fee; or you can call for a free copy of your credit file mailed to your home. I do insist that you check your credit bureaus every couple of years to ensure all the information is correct. Mistakes can be made and fraud can happen; you will be the only one hurt if it's not caught. Some of the information that is held in your credit report is: Current/past residences and employment, business' you have credit with, how long you have had credit, your payment history, credit limits and balances and any public information (judgments, bankruptcies)

Both Equifax and Trans Union use a system called "FICO" scoring created by Fair Isaac Corporation (Equifax brand name is BEACON and Trans Union is FICO Risk Score, Classic). This is a mathematical equation that evaluates the reported data of your credit information and compares it to patterns of hundreds of thousands of past credit reports to identify your future credit risk. FICO scores range from 300 to 900; the lower the score the worse the credit rating which translates into less credit and higher interest rates because of the greater chance for defaults on payments.

There are five main categories of information that a FICO score evaluates. These percentages are based on the importance of those categories. But, the importance of any factor depends on the overall information in your credit report:

30% Amounts owed
35% Payment history
15% Length of credit history
10% New credit
10% Types of credit in use

Amounts owed

Try to pay off any credit card balances monthly; if you have to carry a balance keep it below 35% of the credit limits as your score will drop with higher balances. 50% and higher on multiple accounts could indicate a higher risk of over-extension.

Payment history

Keep all payments current; when you are late 30, 60, 90 days your score will be adjusted accordingly. If any accounts have been sent to collections, ensure you pay off any outstanding debt as this will greatly affect your ability to get credit from anybody. Information older than two years has less impact but always ensure you pay on time. Making payments on time is the best way to increase and keep a good score.

Length of credit history

The longer you have credit the better score you will have; even if there has been a late payment or two it still shows your ability of managing credit for longer periods of time. Don't close those cards if they are not costing you.

New credit

Do not shop for and acquire multiple credit accounts in short periods of time. Your file will be flagged as searching for credit and your score will drop. If you get turned down by a credit grantor ask why, check your credit report; don't keep on applying for credit as more than three requests for credit per year will affect you. If you do "rate shop" ensure you keep it within a two week period.

Types of credit

The types of credit that you use is a small factor but still a factor. Do you only have credit cards, lines of credit or loans; the score is based on the mix of credit you have. Two lines of credit, (credit card and a bank loan) usually shows your ability to manage your credit well. Don't get credit that you don't intend to use because your total amount of credit accounts are considered as well. It is difficult to say how much is too much, because it will vary depending on your overall credit.

30% of your credit rating is based on the amounts you owe.

Tips to Improve your score

-Pay your bills on time, if you have missed payments, get current and stay current.  This is one of the main factors lenders look at if you have had problems before.  The lender will have more confidence in approving a mortgage if they see you have managed your credit well for a period of time after the problems.

-Paying off a collection account will not remove it from your credit report but lenders look more favorable at you if it is.  Most lenders will not advance funds until the collection is paid.  It is best to pay the collection off, and always get a receipt to show proof of payment.

-Try to keep balances below 35% on credit cards.  The two main reasons are: this will affect the total amount of mortgage you will get, and lenders do not want to see possible overextension.

-Pay off debt rather than moving it around.

-Don't close unused credit cards or accounts.  On average a lender is looking for about 2 years of credit history (there are exceptions to this) if you have a card that you haven’t used in a couple of years use it then pay it off to keep it active.  The longer the credit history the better.

-Closing a credit account does not make it disappear from your credit file.  That account will stay on for up to six years because it is part of your credit history.

-Use your credit cards responsibly.

If your credit is good then keep doing what you are doing. If you need to boost it up, improving your credit score takes time. There is no average as every situation is different and ability varies with each person; I suggest 6 months to 2 years depending on the circumstance. I work with many people that are re-establishing their credit and it works. Good credit means better interest rates and lower mortgage payments. In general, more credit options and better terms. 

Compare the cost of rent and owning....