Credit Myths and Realities

Your credit score is a numerical representation based on your current and past credit history, it will range between 300 (worst) and 900 (best).   There are always misconceptions on what affects your credit; here are a few myths and realities:

Myth:  There is no harm in paying bills late, as long as you pay the full amount and it doesn’t happen often.

Reality:  Your payment history has the largest negative impact on your credit score.  It is important to pay your bills on time, and for the right amount. 

Myth:  Applying for multiple credit cards does not affect your credit score.

Reality:  – Multiple credit inquiries can lower your credit score.  However if you are looking for mortgage or auto financing and have inquired at different institutions; lenders will usually give you a thirty-day buffer.  For example, if you apply for a mortgage on June 30^th, and the credit report shows three previous inquires in June, those inquiries will be ignored since they took place within the thirty-day buffer zone. 

Myth:  In Canada, your credit rating is affected by your age, gender and income level - The higher your income, the better your credit rating.

Reality:   Your credit rating is based on how you manage your finances.  Lenders will look at whether you pay your bills on time, carry a balance or regularly miss payments.

Myth:  Reducing your credit card limits will improve your credit score.

Reality:  Lenders like to see a gap between your limit and the balance you’re carrying.   A good rule of thumb is to keep your balances owing below 30%.   So if you line-of-credit is for $10,000 keep your balance owing below $7000, balances over this amount may lower your credit score.

Myth:  Repeatedly replacing old credit cards for newer ones with lower interest rates is a positive thing.

Reality:  The longer your credit history with one lending institution the higher your credit score.  Therefore, if you are considering reducing the amount of credit cards you have, cancel the one that you most recently acquired.

Myth:  Using cash all the time is good because you don’t owe anything, therefore you must have great credit.

Reality:  Using credit responsibility is one of the easiest and fastest ways to increase your credit score.  Unfortunately those people who use cash to make purchases on a regular basis may have a lower credit score than those who use credit.

Maintaining good credit is one of the most important things you can do for your financial health.  Since checking your own credit does not affect your credit rating, it is recommended you request a report at least once per year, read it carefully and reporting any discrepancies.  You can attain a copy of your credit report at www.equifax.ca or www.transunion.ca .  

Have a great weekend,

Tracey

 

 

Source:  Mortgage Brokering in Ontario, Agent Edition, written by Joseph J. White, Advisor.ca by Staff posted 3-9-14