Incurring debt is part of life for most people. Understanding how best to handle credit will help you maintain control of your overall financial situation as your credit affects your ability to borrow money.
Your credit report is simply a listing of all your mortgage and consumer debt. In Canada, two bureaus, Trans Union and Equifax, have a credit file on anyone who has ever borrowed money. Every time you borrow money or make a payment on a loan or credit card, the lender reports the information about that transaction to these two agencies. In addition to credit information, you will also find liens and judgments on your credit report as well as your address and possibly your work history. The accumulation of all of this information is called your credit report.
A credit score is a rating used by a lender to help determine whether you qualify for a particular credit card, loan, or service. Based on information in your credit file, the credit reporting company analyzes your information using a complex mathematical model to yield your credit score.
Most credit scores estimate the risk a company incurs by lending you money or providing you with a service - specifically, the likelihood that you'll fail to make payments in the next two to three years. The higher the score, the less risk you represent. Your score is calculated by a mathematical equation that evaluates many types of information found in the credit file.
One thing that many people do not know is that you have a legal right to obtain a copy of your credit report. One of our Mortgage Agents can assist you in obtaining a copy of your report and to go through it with you to verify that all of the information is true and correct. The good news is that your credit report is a working document which means you have the ability over time to repair any damaged credit and increase your credit score.
Five Steps to Boost Your Credit Score:
1)
Pay down your credit cards. The number one way to increase your score is to pay down your cards to 30% of their limits. Revolving credit like credit cards seems to have a more significant impact on your score than car loans, lines of credit, and so on. By paying down your cards to 30% you are leaving a big gap between what your limit is and what you owe- a move that is very favourable to increasing your credit score.
2)
Limit the use of your cards. Racking up a large amount and then paying it off in monthly installments can hurt your credit score. If there is a balance at the end of the month, this affects your score – credit formulas don’t take into account the fact that you paid it all off the next month. By being more accountable of your spending on a daily or weekly basis through the use of a budget, you can keep those cards below the magic 30% mark.
3)
Check your limits. If your lender is slow to report your monthly transactions, this can have a big impact on how another lender may view your file. Make sure everything is up to date. Old bills that have been paid can come back to haunt you. Some financial institutions don’t even report your maximum limit. As such, the credit bureau is left to only use the balance that’s on hand. The problem is if you consistently charge the same amount each month – say $1,000 to $1,500 – it may appear to the credit scoring formula that you’re regularly maxing out the card. You could go on a wild spending spree to raise the limit but a more sensible solution would simply be to pay your balance down or off before your statement period closes. When making payments online, do so about a week before the closing date printed on your latest statement to ensure the payment is received on time – it can take up to five business days for a payment to be received. This won’t raise your reported limit but it will widen the gap between your limit and your closing balance which should boost your score.
4)
Keep your old cards. Older credit is better credit. If you stop using those older credit cards, the issuers may stop updating your accounts. As such, they will lose their weight in the credit formula and, therefore, may not be as valuable – even though you have had the card for a long time. Use these cards periodically and then pay them off.
5)
Don’t let mistakes build up. Dispute any mistakes or situations that may harm your score. If, for instance, your cell phone bill is incorrect and the company will not amend it, you can dispute this by making the credit bureau aware of the situation.
