“We live in a country
where you can’t do much without having credit, and if you’re being responsible
about it and not overextending yourself, then it’s always a good thing to
have,”
Your credit file is
created when you first borrow money or apply for credit. On a regular basis,
companies that lend money or issue credit cards to you, including banks,
finance companies, credit unions, retailers, send specific factual information
related to the financial transactions they have with you to credit reporting
agencies.
Credit report
A credit report is a
"snapshot" of your credit history. It is one of the main tools
lenders use to decide whether or not to give you credit.
Your credit score is a judgment about your financial health, at a
specific point in time. It indicates the risk you represent for lenders,
compared with other consumers. The credit-reporting agencies Equifax and Trans
Union use a scale from 300 to 900. High scores on this scale are
good. The higher your score, the lower the risk for the lender. Lenders may
also have their own ways of arriving at credit scores. In addition, lenders
must decide on the lowest score you can have and still borrow money from them.
They can also use your score to set the interest rate you will pay.
Our credit score affects us in a variety of ways
these days that we may not be aware of. It affects mortgage rates, insurance
rates, and can even affect our ability to get a job.
In order to reach or maintain a healthy score we
have to do three things: limit delinquency of payment, limit utilization of
credit, and maintain a healthy mix of credit. Considering the largest portion
of our credit score is made up of our payment history and the simple exercise
of paying your bills on time, a simple solution is to set up automatic bill
payments.
It might happens that paying your credit card balance in full every month might
actually leave you with a lower score versus someone who never misses a
payment, but always carries a balance.
If your score isn’t perfect, don’t sweat it.
Having no debt is better than a high credit score. But if your debt situation
is out of control, or if your identity has been compromised, checking into your
file is the first step in setting things right.
Experts say establishing a
solid credit rating is key to building life-long financial stability and not
throwing away money on high interest payments.
Some credit-reporting agencies report the
lenders' rating of each of your credit history items on a scale of 1 to 9. A rating of "1" means you pay your
bills within 30 days of the due date. A rating of "9" means that
you never pay your bills at all or that you have made a consumer debt repayment
proposal to the lender.
A letter will also appear in front of the number:
·
"I" means you were given credit on an installment basis, such
as for a car loan, where you borrow money once and repay it in fixed amounts,
on a regular basis, for a specific period of time until the loan is paid off.
·
"O" means you have open credit such as a line of credit, where
you borrow money, as needed, up to a certain limit and the total balance is due
at the end of each period. This category may also include student loans, for
which the money may not be owing until you are out of school.
·
"R" means you have "revolving" credit, where you
make regular payments in varying amounts depending on the balance of your
account, and can then borrow more money up to your credit limit. Credit cards
are a good example of "revolving" credit.
"R" Ratings :
The most common ratings
are "R" ratings. These are known as North American Standard Account
Ratings and are the most frequently used. The "R" indicates that the
item being described involves revolving credit. If you always pay on time, it
will be coded an
R1. If an amount was
written off because you never paid it back, it is coded R9. The R ratings are a coding system
that translates "on time", " one month late", "two months
late", etc., into two-digit codes.
R7: Making regular payments through a special
arrangement to settle your debts.
R8: Repossession
(voluntary or involuntary return of merchandise).
R9: Bad debt; placed for collection; moved without
giving a new address or bankruptcy.
Here are six other things that can hurt your
credit rating:
Too much
credit:
“Having 10
different credit lines with low balances on them, a creditor will look at that
and say, ‘This person is coming to me for an additional loan, but if they max
out on all their different credit lines and credit cards, they are going to
have way too much debt in comparison to what they’re making, so adding another
[loan]could potentially put this person in worse position.
Never using
your credit card :
Part of your credit score is based on your payment history, so
never using your card could hurt you because the creditor can’t assess the risk
associated with you. “If you have no history, you’re a bit of an enigma to the
creditor, But if you do have a history and you’re showing repetitive payments …
you become a better risk for the creditor.”
Parking
tickets:
If you don’t
pay parking tickets or library fines, your municipality will eventually want to
collect. “If it ends up in the hands of a collection agency, it’s going to
affect your credit score,”
Divorce:
If you
and your ex-spouse applied for a credit card or line of credit jointly, be
aware that you may be responsible for any debts incurred by your ex, even if
you split the debts as part of the divorce agreement.
Applying for lots of cards:If you are the
type of person who applies for every credit card in every store that you’re
offered, beware. A large amount of hard pulls” (inquiries on your credit for
the purpose of obtaining new credit) can make you seem like a bigger risk. If
you’re showing a lot of inquiries over a short period of time, Lander take it
as: It could be that you’re having difficulty managing your money and something
is on the horizon that you as the consumer can see but isn’t readily evident to
the creditors. That’s a signal to them to say, ‘Whoa, let’s take a look at this
because all of a sudden, this person is looking for more credit. If one or two
or three of these [cards] start to land, they will have all this credit, but
not the income to handle it.'
Renting a car:
Car rental
companies could be doing credit checks on you when you rent, which could
increase the amount of “hard pulls” you’re getting.
Debt-to-credit
ratio is the second most
important consideration when it comes to credit. Ideally we should be using
less than 40 per cent of our available credit.If you have an open credit card
that you no longer use, you don’t need to close it, especially if it doesn’t
have an annual fee. Considering “a major determining factor in your score is
your percentage of available credit, you want to have the highest level of
available credit, while using as little of it as possible. If you have a card
you no longer use, keeping it open will actual lower your credit utilization
rate.Having a lower debt-to-credit ratio equals a higher overall score. The
other option before you close an account is to secure an increase on available
credit on the cards you are keeping open. Paying off debt should therefore be a
priority, and so should having a healthy mix of credit in your name: credit
card bills, utility bills, car loans, and so on.
source globe and Mail
