How to Establish a Strong Credit History
Your Credit Rating
There is a difference between your credit rating and your credit score. Your credit rating refers to a record of your credit, or credit history. Every time you borrow money – through a financial institution, credit card, store, employer or educational institution – you are making an entry into your credit record. And every time you apply for credit, the company considering making the loan purchases a copy of your credit record. In Canada, there are two major credit-reporting bureaus: Equifax Canada and TransUnion of Canada.
What’s in Your Credit History
Your credit history is a good read. It’s basically a biography of your life that is written by following a money trail. It starts with your date of birth, your social insurance number, your employers, and your marital status. It also lists every debt you have, including the limits and outstanding balances on your loans and credit cards. Anything in the public record, including bankruptcies, foreclosures, liens, judgments and even financial counseling, can be reported on your credit record. And like a nasty tattletale, it tells not only how often you have been late with payments, but exactly how late you have been.
Why Is Your Credit Rating Important?
Establishing and keeping a good credit rating is one of life's imperatives. With cash transactions slowly becoming a part of history, a good credit rating is necessary to purchase major, and sometimes minor, goods. Try to rent a car, make an airline reservation, check into a hotel, or buy something online without one.
The Credit Score
A credit score is a computer-generated number reflecting the weight given to many of the variables within your credit history. Some financial institutions may use their own scoring system, while other lenders use the commercial scores available through Equifax and TransUnion. The score is used to predict how likely a borrower is to repay the loan or fail to meet his obligations. You can order a copy of your credit report for $15.50, or get the report along with your credit score, and an analysis, for $23.95 at www.equifax.ca.
How Loan Decisions Are Made
Traditionally, lenders based their decisions on the character of the borrower, the security offered, the ability to repay, the amount borrowed and the purpose of the loan. Now, most banks simply enter your current credit score data and other data into a computer and out pops a single number. If the number falls above the bank’s pre-determined figure, you get the loan. If not, you walk out the door empty-handed.
What If My Bank Said No?
All the big banks use automated credit scoring as a decision-driver almost exclusively. But not all financial institutions rely on this narrow, unsympathetic form of assessment. Most credit unions, including Creative Arts, make credit decisions the old-fashioned way – looking at the borrower’s recent circumstances, strength of income, security offered and other factors.
How to Improve Your Credit Rating
If you want a good credit rating and a good credit score, follow these steps:
Pay your bills on time. Late payments lower your credit score.
Own between two and four credit cards. Too few cards shorten your credit history. Having limited credit available also impacts your score negatively. But too many cards will indicate that you are a credit seeker or financially stretched.
If you have to borrow on credit cards or lines of credit, keep the balance well under the limit; lines that are maxed out damage your score badly. Capacity (i.e., unused borrowing room) is 30% of your credit score.
Don’t cancel the cards you have, even if the balance is zero. Length of credit is worth 15% of the score.
Don’t accept every credit card offer that comes your way. Make requests for additional credit infrequently. Every time you apply for a loan, it shows on your credit report and affects your score.
Pay more than the minimum required on your credit card statement. Not only do large credit card balances hurt your score, the interest rate on credit cards is usually exorbitant.
Where possible, convert revolving debt (i.e., credit cards and lines of credit) to installment debt (i.e., fixed-payment credit such as auto loans, personal loans for home renovations, or mortgages)
Credit is a necessary part of life. Make sure your credit rating and credit score do you credit. Call Creative Arts at 416-642-6749 or 877-643-3660 to discuss your credit score or your borrowing needs.