Credit Assess
Your three-digit credit score enables financial institutions to gauge the likelihood that you will pay back borrowed amounts, based strictly on how you handle credit. Higher scores empower you to negotiate lower interest rates on mortgages, personal loans and credit cards.
Scores from the two major Canadian credit bureaus, Equifax and TransUnion, range between 300 and 900, though each bureau scores consumers slightly differently. With both systems, the higher the score, the better, so unless you have a perfect score, you can always work to improve it.
Avoid these five common mistakes to be sure your score is in top shape.
1. Failing to check your credit report for errors.
Mistakes on consumer credit reports are more common than you
might think and can unfairly damage your credit score.
For example, credit bureaus sometimes mistakenly categorize mortgage accounts as revolving credit — which is credit that is automatically renewed as debts are paid off — on consumers’ credit reports. This can unfairly handicap a score because mortgages are treated more favourably than credit cards, since consumers are more likely to repay a loan that’s secured by their home.
It’s also possible that your personal information, accounts, payment history or resolved accounts are incorrect on your report. For instance, if you have the same name as someone else, it’s possible that their information could be on your report. Or, if an identity thief has opened accounts in your name, they’ll show up as yours. It’s up to you to report any possibility of identity theft.
“It is important to check your credit report regularly to ensure it is an accurate representation of your credit history,” Arthur Lam, vertical market leader at Equifax Canada, said in an emailed response to questions.
Review your credit file at least annually, and ask the appropriate credit bureau to correct any errors you find on your credit report.
2. Charging close to your credit limit.
According to Equifax, your credit utilization ratio accounts for about 30 per cent of your overall score. The ratio is the amount of credit you use compared to the amount available to you. Using more than 35 per cent of your available credit limit dings your credit score, according to the Financial Consumer Agency of Canada (FCAC).
One way to keep your utilization ratio low is to ask your financial institution for a credit limit increase. However, this approach can be dangerous since the higher credit limit could encourage you to borrow more than you can afford. A better goal is to be sure you’re not spending anywhere close to your limits. If you do have to make a large purchase, have a plan to pay it back quickly so you know your utilization ratio won’t be high indefinitely.
3. Closing older credit card accounts.
Some consumers don’t realize that their credit scores can go down after they close existing cards that they’ve had open for a long time. The problem is that closing older accounts shortens the length of your credit history – which counts for 15 per cent of your credit score – and erases some of your responsible payment record. While your history on any credit card will stay on your report for six years, it will eventually fall off.
“Older credit accounts form part of your credit history, which is a factor in the calculation of your credit score,” said Lam. “This data contributes to a credit score that is accurate and reflective of your financial behaviors over time. If you have been a responsible credit user, removing that account could impact your credit score.”
While you don’t want to hang onto cards that you never use, especially if they are costing you annual fees, it’s best to try to hang onto the card with your longest repayment history, especially if that history is good. Instead, try to negotiate lower rates or fees on cards that you have responsibly used for a long period of time. If you are an account holder in good standing, there is a good chance your issuer will be willing to negotiate your rate, fees or credit limit.
4. Frequently taking out new credit cards.
Registering for several new credit cards over a short period can depress your credit score.
“Repayment risk increases when multiple credit cards are held,” Brenda Hiscock, certified financial planner at Objective Financial Partners, said in an emailed response to questions. That’s because lenders can’t be sure of how you will use that credit or whether you can afford to pay back balances on all accounts. “As a result, credit scores are reduced when individuals have access to multiple creditors,” said Hiscock.
Not only does opening too many new credit accounts at once make you look desperate, but each new account will result in a “hard pull” on your credit score, which means the lender pulls your full credit profile and score. These pulls are noted on your credit report and each one dings your score. One or two hard pulls is likely fine, but if you have several in a short timeframe, it can bring your score down quite a bit.
To prevent a dip in your score or to avoid rejection, selectively apply for cards or other credit products based on what you are likely to be approved for. Be sure you meet any income requirements and that your score is in good enough standing to qualify for a product before you apply for it.
5. Missing monthly payments.
Late or missed payments can cause your score to drop after they are 30 days overdue. After that 30-day period, the longer it takes you to make the payment, the worse the impact will be on your credit score. Furthermore, you could see your APR go up, or your account sent to collections. At the least, even if you’re only a day or two late, you will have a late fee to contend with in addition to your regular payment.
One more reason to pay on time: every day you’re late, the balance continues to accrue interest, and if your card came with a 0 per cent interest promotion, missing a payment or making it late will likely negate the deal.
If you are unable to make your full payment, it’s best to call your issuer well before the due date to see if you can work out a different repayment plan. Your issuer may be understanding of extenuating circumstances such as a job loss, major illness or other true emergency.
To avoid paying late, always be sure to pay a few days before the due date to give enough time for processing, even if you’re paying online. You may also consider setting up an automated payment to ensure you never forget to pay your bill.
