Credit to Author: Margaret Jetelina| Date: Tue, 22 Jan 2019 14:20:37 +0000
What newcomers need to know about credit ratings
We often hear how important it is to have a good credit score. Every time we apply for credit products, such as credit cards, loans, line of credits or mortgages, a credit check will be required. It is also common for apartment rentals, utilities and mobile phone companies to conduct credit checks while processing applications or prior to providing their services.
The credit or beacon score has a huge role in credit decisions because it provides information about repayment history. This is part of the due diligence process whereby the credit grantor or the company providing services can evaluate their risk and determine the likelihood of receiving regular and timely payments.
There are certain actions we take to increase our credit rating, so that when we need it most — such as when applying for a business or car loan or mortgage for our first home in Canada — it won’t hinder you.
Don’t apply for too much credit in a short timeframe
It is best to avoid mass credit applications within a short timeframe. This is an indication of financial hardship and desperation for immediate access to funds. It may sound ironic, but financial institutions do not want to lend to people who are facing too much financial strain. These individuals are considered risky borrowers. Lenders need to feel comfortable that you can make payments on your loans. So frequent inquiries have a negative impact hence lowering the credit score.
Use credit wisely
A wise approach to credit is to try not to exhaust the entire available amount of credit you have available, and don’t exceed the credit limit. It is all about the ratios. The total debt service (TDS) ratio, which takes into consideration all debts in relation to income earned, needs to be within certain parameters.
The general standard is that the TDS should not exceed 42 per cent. However, each category of lender has a different risk appetite and may vary their standard accordingly. The bottom line is that your income must be able to support your expenses.
A good rule of thumb is to utilize approximately 80 per cent or less of available credit. This also means that it is better to close credit cards that are not being used. Cancelling unnecessary credit will free up space or give more capacity to get approved for the credit that you really need when the time arises.
Make higher payments and don’t be late
By making payments higher than the minimum payment, your score can be improved drastically. It is also obvious that late payments are a recipe for disaster. Failure to pay within 30 days leads to reporting to the credit bureau, and the later the payments, the lower the score.
Receivables transferred to a collection agency, court judgment, consumer proposal and bankruptcy all have a terrible impact on your credit report. In fact, it takes seven years after a bankruptcy to be given a fresh slate. It is basically impossible to get credit while having a chapter 7 or chapter 13 on the credit bureau. It is mandatory to wait until the specific time has elapsed for the bankruptcy to be removed from the records. A consumer proposal will only be deleted three years after the last payment has been made.
These are some tips to keep in mind whenever you are faced with a financial decision. A simple choice of whether to go shopping with a credit card or to wait until you have the extra cash can either positively or negatively affect your creditworthiness when you will need it the most.