Tag Archives: credit score

Why your credit score matters

And how to improve it

Despite holding multiple credit products (like credit cards or lines of credit) many Canadians don’t understand how debt and their behaviour around it affects their credit score in the eyes of the credit bureau—or why it’s important; on top of that, 47% of Canadians don’t know where to check their credit score.

Your credit score is a three-digit number, between 300 and 900, that measures your creditworthiness. The higher your score the better, as it’s used by lenders and financial institutions to determine whether your credit-worthy or not. In general, a low score could mean you’re declined on a loan or receive a higher interest rate, while a higher score allows for lower interest rates and better options when it comes to things like getting a mortgage and borrowing money. Your credit score number essentially indicates how likely your are to repay money you borrow, based on how you’ve handled past financial obligations.

How is your credit score determined?

Most lenders want to see two forms of active credit for at least two years. The longer the history reporting, the better.

Your credit score is made up of the following:

  • 35% payment history. It’s important to make your payments on time. Missing a $4 dollar payment on a credit card could be as bad a missing a $400 payment, so don’t skip the minimum payment. This also includes collections. Some creditors (even city parking ticket collectors) may report that you haven’t paid them to your credit bureau, or even use a third-party collection agency to get their money back. These collections on your credit bureau can lower your score.
  • 30% utilization ratio. This is your level of indebtedness, or how much of your total available credit you’re using.
  • 15% length of credit. The longer you have an account open, the better. It shows you’re capable of managing credit responsibly.
  • 10% types of credit. It’s good to have a mix of different types of credit (revolving credit like credit cards and lines of credit are riskier than personal loans so it’s better to have fewer of those in your mix) to show that you can handle your payments.
  • 10% inquiries. These happen every time you agree to a “hard credit check”. Hard checks usually happen even when opening a chequing account with a bank or a new phone plan.

3 things that can help improve your score:

1. Practice good utilization ratio habits

A relatively fast way to improve your credit score is to start practicing good utilization ratio habits. Once you start doing this, it could improve in as little as 30-60 days. If your credit card limit is $1,000 and your balance is $1,000, your utilization ratio is 100 per cent — and this not good in the eyes of the credit bureau. Credit bureaus base credit scores on behaviour with credit. If you’re constantly maxing out your credit cards, it could imply that you’re not far away from defaulting on your minimum payments. It looks like your income is stretched. Set an imaginary limit of 70 per cent and don’t go over that. Doing this will keep your credit score healthy. For example, if your credit card limit is $10,000, don’t borrow over $7,000.

2. Think twice about closing an unused credit card

It may seem like a good idea to close a credit card that you’re not using, or have paid off and are trying not to use. But, closing a card, or leaving it inactive can negatively affect your credit score. This goes back to the length of credit factor that the credit bureau reports on which makes up 15% of your credit score. Rather than closing the card, consider using it for a monthly subscription, like Netflix or Spotify, and set up an automatic monthly payment from your bank account to ensure it’s covered. This trick will also improve your utilization ratio and payment history, since you’ll be staying far under your limit, and making on-time payments.

3. Consolidate credit card debt

Credit cards are considered revolving debt; meaning when you pay them down you can keep borrowing against them. This type of debt is psychologically proven to keep people in debt. Many revolving credit products allow you to pay back only the interest, which is a major reason why so many people find themselves stuck in what feels like an endless cycle of debt. If you’re like 46% of Canadians* and you carry a credit card balance every month, you could benefit from a personal instalment loan to help get out of the revolving debt cycle. Unlike credit card debt, an installment loan has a specific term and requires you to pay back interest and principal in every payment, which means you have a set deadline for paying it off and getting out of debt.

The first step in improving your credit score is knowing it. Mogo offers Canada’s only free credit score with free monthly monitoring. Check your score at mogo.ca.

Source: Special to Financial Post | May 6, 2017 |

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Nine steps to a better credit score

(Photos.com)

My husband and I are pretty competitive, always trying to one-up each other.

It was to my chagrin, therefore, when I learned that although my credit score is excellent, his is better. I have never missed a bill payment, never carried a balance, so what could be holding me back?

According to author and former financial adviser Kelley Keehn, there are lots of innocent things that can affect your score. For example, most people don’t realize there are two important dates when it comes to paying off certain credit cards: the due date and the statement date. The statement date is when the card issuer reports your balance to the credit bureau, not the due date. So even if you pay your balance in full and on time each month, your credit score may not reflect that.

“Let’s say my due date is Dec. 8 and I have a $10,000 limit. I pay it in full before the 8th and won’t be subject to any interest,” Ms. Keehn says. “But, let’s assume my statement date is Nov. 15 – that’s a very important date as it’s the date the credit card company reports to the credit bureau, not the due date. Let’s assume I make a big purchase on the 14th, say for a reno at my home, not thinking anything of it, and pay for some hardwood costing $9,000. The next day the credit card company would report that I’m 90 per cent extended on my credit card.”

If you’re not sure of your credit rating, you can get a free report from Equifax.ca or Transunion.ca that will include your credit history and current credit outstanding. For a small fee, they will include your credit score as well. A good score is 760 or higher, and anything less needs work to improve it, Ms. Keehn says. (To order a free credit report from Transunion, click here. To order from Equifax, call 1-800-465-7166.)

She advises taking these steps to protect and improve your credit score:

1. Know your score. The score range in Canada is 300 to 900 – the higher the better – and reflects a person’s credit history over the past six years. Only 5 per cent of Canadians have a score of 850 or better. Checking your score periodically can alert you to mistakes as well as credit fraud.

2. Pay your bills on time. Making a credit card payment even one day late will hurt your score. If you’re paying online, send the payment at least three banking days before it’s due to allow enough time for the transaction to be processed. Setting up a small automatic payment to your card issuer each month will ensure you never forget to pay at least the minimum.

3. Never exceed your credit limit. If you’re close to being maxed out, make sure you pay more than the minimum or the interest due could push you over your limit. Going even $5 over your limit could lead to a costly fee from your credit card company and will hurt your score each month it happens.

4. Don’t apply for store credit cards. Even if you’re just after a one-time discount for signing up, these cards, with interest rates as high as 29 per cent, are viewed negatively by the credit bureau and drag down your score.

5. Spread out your spending. The percentage of available credit you’re using each month affects your score, so it’s better to have two charge cards at 50-per-cent capacity each than one that is maxed out.

6. Prioritize your payments. Important as they are, mortgage payments generally are not reported on Canadian credit reports, so it’s more important to make your credit card, loan and lease payments on time.

7. Beware of closing accounts. Even if you’re in a dispute with a lender, make your payments. A missed payment will show up on your credit report, can really hurt your score and is very hard to fix. When closing an account, get it in writing that it was closed with a zero balance.

8. Don’t close unused credit cards. If you have a low-interest card you don’t use, keep it open and use it periodically. Having a zero-balance credit card actually helps to improve a low score.

9. Don’t apply for too much credit at once. Don’t lease a car, sign up for a new cellphone and apply for a loan all in the same month or two. The credit bureau sees this as a sign of financial trouble. Beware, also, of being preapproved by several lenders before you’re ready to buy. Although you can check your own credit rating without penalty, preapprovals from lenders count against your score.

Source: DIANNE NICE The Globe and Mail   Published Monday, Nov. 22, 2010 6:39 AM EST  Last updated Thursday, Aug. 23, 2012 4:08PM EDT

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It won’t take much to drive Canadian borrowers over the edge, new study says

There are more than 700,000 Canadians who might be watching the next Bank of Canada decision very closely, because even a modest interest rate increase could push them over the financial edge.

A new study out Tuesday from credit agency TransUnion shows that of the 26 million credit-active Canadians in the country, 718,000 can’t absorb a 25-basis point increase or they won’t have enough cash flow to cover their debts. Raise rates one percentage point, something not likely to happen overnight, and 971,000 Canadians end up in a cash crunch.

The next interest rate announcement is not due until mid-October but the consensus among economists is there will not be a rate hike until the third quarter of 2017. That may be part of the problem, since consumers have come to expect rates will never go up and are now borrowing based on a prime lending rate of 2.7 per cent.

“I would say for five or six years interest rates have been so low, a lot of these consumers look okay because of the low rate environment. This is one of the things we are looking at,” said Jason Wang, director of research and industry analysis with Chicago-based TransUnion. “If everything changes and interest rates are higher, and they have to pay more on a monthly basis back to lenders, they may not be able to handle (an increase).”

The report looked at so-called super prime customers — the people with the best credit and scores in the 830-900 range — who make up the largest segment of the credit-holding population unable to absorb a small increase. Of super prime customers, TransUnion says a 25 basis point increase to interest rates would cause cash-flow trouble for 239,000. Only 101,000 Canadians borrowing with sub-prime ratings, in the range of 300-599, would face the same cash crunch under those circumstances.

Wang said the super-prime customers are far more leveraged and therefore more vulnerable to an interest rate increase. If rates rose one percentage point, 298,000 super-prime customers would face cash flow problems.

On average, credit-active Canadians carried 3.7 credit products, TransUnion said. The study focused on two major types of debt that carry variable rates, including lines of credit and variable-rate mortgages.

The message to consumers is to pay down debt before interest rates start to rise, while issuers need to look at their books.

“Take a look at their prime- and super-prime customers to see if they have a problem, because these are the people who will be surprised,”  Wang said. “We don’t want creditors to be surprised.”

Laurie Campbell, executive director of Credit Canada, said high quality customers have been building up debt because they’re attracted to low rates that never seem to rise.

“There is an assumption that those with better income and good (credit ratings) are in good financial shape,” Campbell said. “It’s not the case at all. We see people in our offices all the time that should be managing well that are not due to a number of factors. One is over extension, they’re biting off more than they can chew.”

Source: Financial Post Gary Marr | September 13, 2016 | Last Updated: Sep 13 8:43 PM ET

 

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Can I Just Walk Away From My Debts?

DEBT

I’ve had a few people say to me recently “If you have debt, just walk away; the banks won’t do anything. My friend stopped paying, and nothing happened to him. Don’t bother with credit counselling, or a consumer proposal, just walk away.” Does that strategy actually work?

The answer depends on your situation.

In some cases the “do nothing” strategy, or walking away, is a viable option.

If you owe money to a bank, they want to be repaid. If you don’t pay them, they will follow a standard sequence of events to collect their money.

The first month you miss a payment they will include a “friendly reminder” at the bottom of your statement, saying something like “this is just a friendly reminder to make your payment; if you already made your payment, please disregard this notice.”

By the second month, the note on your statement will be less friendly: “We will suspend your account if you don’t pay.”

By the third or fourth month, collection calls will start, and you may get threatening legal letters. Eventually your account may be turned over to a collection agency, and then the phone calls and letters become even more intense.

Ultimately, if you don’t pay, the bank has three options:

  1. Stop collection actions and write off your account;
  2. Continue collecting through a collection agency;
  3. Take you to court to get a judgement, which may lead to a wage garnishment.

So when would a bank simply give up? When they have no reasonable hope of collecting from you. That may happen in a variety of situations, including when:

  • The bank doesn’t know how to contact you, because you have moved and they don’t have your address or phone number;
  • They don’t know where you work, so they can’t garnishee your wages; or
  • The bank knows that you have no wages to garnishee, perhaps because you are receiving a pension.

A creditor can only garnishee your wages if you have wages. If you are unemployed, or your income is from a source other than wages from employment, such as a pension, then there are no wages to garnishee.

So the answer to the question “can I just walk away from my debts?” is “yes”, but only if you are not worried about the repercussions of walking away. If you have no assets to seize, no wages to garnishee, and you are not concerned about a low credit score, walking away is a viable option.

DEBT

However, if you have a job, or expect to have a job in the near future, or if you have assets, walking away may not be your best option, because you put yourself at risk for a wage garnishment.

If you owe money to Canada Revenue Agency and have a job, or own a house, or have a bank account, ignoring them is very dangerous. CRA can freeze a bank account or garnishee your wages without a court order.

Here’s my advice: if you have debts, attempt to work out payment arrangements directly with your creditors. They may give you a break on the interest rate or stretch out your payments to allow you to pay them in full. If you can’t make a deal with them, and if you have more debt than you can repay, don’t wait until legal action starts. A licensed insolvency trustee will provide you with a free initial consultation to review all of your options, and they can tell you if walking away is a good option.

If you are 80 years old, and your only income is CPP and OAS, and your only debt is an old cellphone bill from five years ago, walking away is probably your best option. If you are working and can’t pay, a consumer proposal or bankruptcy may be a better option than ignoring the problem and hoping that the problem goes away.

Source : Huffington Post   Licensed Insolvency Trustee, Chartered Accountant

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Secured Credit Cards: Got bad credit? You can still get a credit card…

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Secured Credit Cards

If you have bad credit, one of the best things you can do to start fixing that situation is get a credit card. Sound backwards? A new line of credit that you manage well can do a lot to increase your credit rating. And, in situations involving travel and rental cars, having a credit card makes like that much easier. So, how do you go about getting one when the numbers say no?

Start with Your Bank

If you have a good relationship with a bank, there is a chance that they might approve you for a Secured Credit Card when others won?t. Most banks have credit card offers for current account holders right on their websites. Often, when you apply online for a regular unsecured card from your bank, you can receive an answer right away. Many, if you are not granted a regular card, will automatically offer a secured card instead.

Consider a Credit Union

Credit unions are also more likely than other sources to give those with blemished records a break. One other advantage is that, because they are member organizations, you may be able to get a card with a lower rate, as well.

Read the Fine Print

If you are unable to get a regular card, a secured card may be your only option. The amount that you deposit into the account will equal your credit limit. These cards will almost always have annual fees and higher interest rates than cards available to those with better credit. Make sure you are aware of all of the fees and rules before applying for the card. Some unscrupulous companies that target those with bad credit have monthly fees that, over the course of a year, add up to two to three times the annual fee for other cards.

Pay On-Time Always and Other Rules

Once you have a card, treat your agreement with the card company with the utmost respect. Do not charge over the limit. Make your payment on time every single month. It is best to pay off in full each month and not overuse the card. The percentage of your available credit that you are using affects your credit score, so, low utilization can raise it.

Next Steps

Whether it is secured or unsecured, the credit card you get with bad credit is not going to be the best deal but will help you with the credit repair process. Spend six months to one year using the card a bit each month and paying it off in full. Then, call and ask for a better offer. If you have a secured card, ask to be approved for one that is not secured. If you were able to get one without a security deposit, ask for a higher limit and a lower interest rate. Over time, you will get access to better and better deals and expand your financial opportunities. – See more at: www.keycreditrepair.com.

Source: Real Talk Boston

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How Credit Inquiries Affect Your Credit Score

Have you noticed inquiries on your credit report? Not sure what they mean? Soft and hard inquiries are the result of potential creditors assessing your credit report after you’ve applied for things such as a credit card, mortgage, or car loan. Hard and soft inquiries each affect your credit differently. Read on to learn more:

What Are Soft Inquiries?

Soft inquiries typically occur when your credit report is pulled for a background check. This can occur when you are applying for a new job, getting pre-approved for lending offers, and even when you check your own credit score.

While they will usually show up on your credit report, this isn’t always the case. Plus, they won’t affect your credit score, so you don’t need to be concerned about them.

What Are Hard Inquiries?

Hard inquiries occur when a lender pulls your credit report to make a lending decision. This takes place most commonly when you apply for a loan, credit card, or mortgage. However, there are other reasons that your credit may reflect a hard inquiry, such as when you request a credit limit increase. They can, in some cases, lower your FICO score by one to five points and can remain on your credit report for up to two years. Typically, the more hard inquiries on your credit report, the likelier it is to affect your score.

Multiple hard inquiries in a short period of time can cause significant damage to your credit. When multiple hard inquiries come through at once, the credit bureaus assume you are desperate for credit or can’t qualify for the credit you need. Any future creditors may also take this information and assume that you are a high risk borrower, which will reduce your chances of getting the credit you need. In fact, according to myFICO, people with six hard inquiries or more on their credit are up to eight times as likely to file for bankruptcy, compared to people with no inquiries — meaning that more inquiries usually means greater risk.

Exceptions to the Rule

There are certain instances that are gray areas, which may result in a soft or hard inquiry depending on the situation (such as when you rent a car or sign up for new cable or Internet service). If you aren’t sure about whether your actions will result in a soft or hard inquiry, you can simply ask the financial institution you are requesting financing from.

Another exception is when you are rate shopping. Generally, your FICO score will only record one single inquiry within a 14–45 day period if you are shopping for the best mortgage, auto loan, or student loan rates. By doing all of your shopping for the same type of loan within a two-week span, you can reduce the effect on your credit.

Source: WiseBread.com By Andrea Cannon on 7 March 2016

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Fixing Your Credit After a Bankruptcy to Apply for a Mortgage

When I first started working with Charlie (not his real name) in 2005, his bankruptcy had just been discharged, meaning his remaining debt was cleared. His credit score was 526, and he didn’t think he had a chance to even get a credit card.

Charlie’s bankruptcy filing was needed after a difficult divorce and a medical emergency. In fact, a a majority of people who seek bankruptcy protection do so after a medical emergency, difficult divorce, job loss; or some combination of the three.

It didn’t take long for him to realize that his financial life was not over. Within a couple of months, he’d gotten more than a dozen credit card and other loan offers. After the discharge of a Chapter 7 bankruptcy, you’re considered an even better risk than someone who still has a mountain of debt because you can’t file for bankruptcy for at least eight years. In reality, you can get a credit card immediately after your bankruptcy discharge.

Many people think, That’s exactly what got me into trouble in the first place, so I’m going to avoid plastic in my life forever. That’s a huge mistake if you want to buy a house. You need to rebuild yourcredit score, and the best way to do that is to show that you can manage credit wisely. A credit card history that shows you can pay your bills on-time every month is one of the best ways to rebuild that history.

With my help, Charlie’s credit score was back to 646 in about 2½ years, which is enough to qualify for an FHA and VA loan even in today’s rough mortgage marketplace. When we checked his score in January 2011 it was back up to 727; now he can qualify for some of the best interest rates.

The key is to work on three pieces of the puzzle at the same time immediately after the bankruptcy: Clean up your credit report, begin rebuilding a positive credit history and start saving. Now that you don’t have credit bills to pay any more, start putting as much of that money aside as you can to save toward the downpayment on your next home. The more money you can put down, the better you will look to a mortgage banker.

Fix Your Credit Report

The last thing you probably want to do after a bankruptcy is to review your credit report and see all the damage that you did. Get over it. The quicker you clean up that report, the faster you will be able to improve your credit score. You can get a credit report for free from each of the credit reporting agencies at AnnualCreditReport.com. By federal law you are entitled to one free report each year.

When you get that report, review it and note any errors you see on the report. For example, you may find accounts that are not yours or lenders who reported late payments that are not accurate. The credit reporting agency will send you instructions about how to make corrections. Follow those instructions carefully and make your corrections. Send any proof you have that the account reported is incorrect. The credit reporting agencies tend to believe your creditors rather than you, so the more proof you can send the better.

In addition to making corrections, also inform the credit reporting agency of your bankruptcy and note any accounts on that report that were discharged by the bankruptcy. The credit report agency will then note the bankruptcy, and that will start the clock for the debt to be removed from your credit history. Most negative credit accounts can stay on your report for seven years from the last date of activity. A Chapter 7 bankruptcy stays on your credit report for ten years.

But as a negative mark ages on your credit report its impact on your credit score becomes less and less significant, which is why you can rebuild your credit score even before the bankruptcy drops off.

You may find that you have to go through the correction process several times. Each time the credit reporting agency fixes a report, they will send you a corrected copy. Check it again for any errors and report any remaining errors until your credit report is accurate and all your discharged accounts are noted.

Rebuild Your Credit History

While you’re working with the credit reporting agencies to clean up your credit report, you should also be working on rebuilding your credit history by opening one or two credit accounts to begin positive reporting on your credit report. Each time you pay a bill on time that will be a positive mark and will help to minimize the negative marks.

You’ll likely have to start with a secured credit card. These cards usually require an annual fee and charge higher interest rates. While they’re not the best deal out there, they may be your only choice right after a bankruptcy. After about six to 12 months of using a secured credit card on time, you should be able to get an unsecured card with better terms.

You also may be able to get a retail credit card. Don’t go overboard with getting new credit now that you can. Stick to one or two credit accounts to show you can use credit wisely and pay it on time.

Monitor Your Credit Score

As you’re rebuilding your credit score, you may want to monitor your progress. If your score continues to go up, you’re on the right track. But if you find that your score goes down in any quarter, think about your credit activities. Did you charge a large item? Did you open a new account? That way you’ll learn what does positively and negatively impact your credit score so you can be sure you have the best score before applying for that mortgage in the future.

Six months before applying for a mortgage, don’t take on any new debt and risk ruining all the work you did to rebuild your credit score. Keep your credit accounts active but your balances low to get the best credit score.

Source: AOL Real Estate – Lita Epstein Mar 4th 2011 

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