Put Money in Your Pocket – Your Credit

As an advisor I help people in many areas of their financial picture.  One area that I have a strong focus on is debt and credit due to my additional activities as a mortgage agent.

We often get caught up focusing on the short-term, such as payments we have to make this week, next month or on something we are going to buy soon.  By thinking longer-term about our goals we can have more for less.  Giving up a little today can pay off in a big way down the road.  That may be in various ways, such as through tax savings, compound growth or the way we maintain our credit.  Today the focus will be on credit.  Building and maintaining our credit can pay off very well over the long-term.   Lenders will give us better terms and interest rates if we have great credit, which can mean substantial savings.  The reverse of this is that if we let our credit slide, the long-term costs can be overwhelming.  Read on to see how your credit score is calculated and by extension what you can do to save yourself money down the road.

I often get questions about credit scoring, ‘Why is my credit poor?’, ‘How do I keep and/or improve my credit?’ and ‘What is an R3?’ are just a few examples.

Many of us are at least concerned about what condition our credit is in.  Most of us have some idea of what our credit is like, however the rules that guide the checks and balances that determine a credit score are not always immediately apparent.  In this short article I am going to outline some of the more common mistakes that I see clients make in my daily dealings with mortgage and investment clients.   Many times the mistakes are innocent.  Innocent or not, credit reporting agencies for the most part don’t care, therefore each blemish shows up on your credit report.  The industry has determined that one of the best indicators of a borrower’s propensity to repay a loan is how well they repaid in the past.   This is one of the more significant facets represented in your credit score.  You’re probably not overwhelmingly surprised by this, but there is more, if you’re still interested read on.

Most people are familiar with the term Beacon score, this term came from Canada’s largest credit reporting agency, Equifax.   Equifax produces a score that ranges between 300 and 900 points, the more points you get the better off you will be.  It is based on a number of criteria.  Some of these criteria are out of your control, such as your age, marital status, number of children and address, to name a few, all of which may indicate varying levels of stability, ability to work or length of time your credit has been established.  It is worth noting that a score of 680 or greater generally provides you with very good borrowing options, above 750 will open doors to the best financing available.  The difference between having a score below 680 and above 680 can be thousands of dollars of interest costs on your next mortgage or other debt.  There are a number of criteria that you can affect.  Here are some tips on keeping your score above 680.

Not paying within 30 days

Repayment history is one of the most significant factors, accounting for around 35% of your score.  Lenders like to be repaid on time, if they are not repaid on time they let all other lenders know via credit reporting agencies, thereby negatively affecting your score and hampering your ability to borrow money in the future.  To keep your payment history in top shape, all you need to do is make minimum payments by the date specified on your statement.

Ignoring small balances

I have often seen people ignore a small balance on a ‘big box store’ card, the minimum payment may only be $10, missing that payment will give you an ‘R2’ (meaning you paid within 60 days), if you do not pay within 60 days you will get an ‘R3’ and so on.  The ‘R’ stands for revolving, like a Line of Credit or a credit card, ‘I’ for instance stands for instalment, this would be a car loan or a personal loan amortized and paid down over a specified period.  The number beside ‘I’ or ‘R’ represents how long it took to make the minimum payment.  A three for instance means you paid within 90 days.  You do not want R3s.  Missing minimum payments on small balances can be very damaging to your credit score.

Leaving balances over or near the limit

Level of indebtedness also makes up a significant portion of your score, approximately 30%.  If you are already ‘maxed out’ your score will be lower indicating to lenders that you should not be lent more money.  Keeping balances at or near limits particularly where high rates of interest are charged indicates mismanagement of your credit.  Keep balances well below the limits, 60% of your credit limit is good target to stay under.  You can use your high limit to make a purchase but should try to reduce the balance to 60% of the limit within a short time period.

Multiple credit reports

I have often had the question, if you check my credit, will my score go down?  It is true that multiple credit reports can negatively impact your credit score, however the purpose of that scoring metric is to target credit seekers, not someone who is going to a couple of places looking for a mortgage.  A credit seeker is essentially someone who is going from place to place trying to get multiple credit cards or other credit over a short period of time.  This is considered risky and unpredictable by credit agencies and naturally will be reflected in that person’s credit score.

Having no credit is not good.  Having bad credit can be worse.

I have heard that bad credit is better than no credit.  This is all relative.  If your credit is so poor it is irreparable for a number of years, I think I would rather be starting from scratch.  With that said it is important to have credit.  Typically two credit streams over a couple years time span is usually the minimum that lenders would like to see (usage of two credit cards for example).  You can be rejected for a loan because you have no credit.  If you are thinking that sounds like a vicious cycle you would be right.  How do you get credit if you don’t have any?  You usually start small, department store cards are the easiest to get.  Once you have one, use it conservatively, wait for the statement, and then pay it.  If you pay off the card before the lender has reported to the credit reporting agency they will report nothing and you will not build credit, hence the reason for waiting for the statement before paying off.

Although I have not covered all the factors that make up a persons credit score I believe this article covers the common ‘trip ups’ that people experience as well as the bulk of what makes up a persons credit score.  The potential short-term pitfalls listed in this article can have long-term impacts that can take years to fix and cost you valuable time and higher interest costs while you rebuild.  Keep shopping, but keep these tips in mind.

Chris Grypma
Advisor and Mortgage Agent
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