Ten Rules for the Ideal Credit History!

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On a daily basis I face credit related issues. People tend to make the same mistakes over and over. I already touched upon this topic during my workshops, wrote about this on my blog and published real life cases. It is crucial to be aware of all factors influencing a credit history as information changes often and the factor that were important yesterday might become irrelevant today.

Credit history plays a key role for banks. It is an insight into the clients capacity to repay along with past history and future projections. A credit history used to be of less importance in the past, however now we cannot even choose the bank or discuss interest rates without reviewing the credit score. It is also becoming increasingly typical in areas that have no direct relationship with banks. For instance, some employers request a credit check of a potential employee. Insurance companies look into the credit history prior to entering an insurance agreement or offering an insurance discount. There is a connection made that a responsible borrower will upkeep their property more responsibly. Landlords of apartment complexes have always checked the credit bureau however it is becoming increasingly popular in the single family rental sector .

A client with a poor/bad credit history will be declined for mortgages that have low rates and favourable conditions.

I would like to highlight the major points for a “good” credit history

1) One of the most essential factors is on-time payments of bills. 35% of your credit history depends on punctual payments on credit cards, loans, etc.

2) Something relatively new is that your cell phone and internet bills affect your credit history. With some banks, even your mortgage reports on your credit history. On a weekly basis we see cell phone delinquencies damaging credit ratings. Mortgage delinquencies are almost an immediate stop & decline if you are trying to buy the next house with less than 20% down payment.

3) Utilization of credit is a critical factor as well. If your credit card limit is $2,000 balance is always exceeding $1,300.00 you are above the recommended 65%. In the same scenario if you need to use $1,800.00 monthly consider increasing your credit limit to $3,000.00.

4) If you have several credit cards, then try to use them equally. Let’s say you have three cards that each have a $2,000.00 limit… At the end of the month, don’t allow one of your cards to have a balance of $1,800.00 and the other two remain unused. Try to use balances equally. By repaying multiple cards on time and managing three accounts properly you are building credit worthiness.

5) It is important not to exceed your limit. People often spend every penny available of their approved limit and think its okay because they are within their right. If you are purchasing a large item using credit to “collect points” this is okay but make a payment immediately. What happens otherwise is the interest on the credit card is added to the balance and being over limit destroys your credit rating immediately. In an isolated incident your credit will rebound, but if this becomes a trend that you are over limit, it will take months to begin rebuilding.

6) Applying for different loan products within a short period of time also negatively affects a credit history. For example, you order a credit card, apply for a loan product and apply for a line of credit. In this case, a credit bureau acts on the assumption that you are in financial trouble and trying to solve it with multiple loans.

7) “Collections” are extremely harmful for your credit history. If you fail to pay a loan or credit card in full, the company will assign your file to a third party collection agency and they will pressure you to pay. This is extremely harmful for your credit history, as this will be kept recorded on your history for 7 years. With the “Prime” or “A” Lenders, they will force the collection to be paid before granting any credit and the reasoning regarding why you failed to pay will also be questioned and scrutinized. Consider this carefully when fighting with a small cell phone bill because you are not happy with their service. Collection Agencies will offer you a “settlement” offer where you have to pay only a portion of what is owing. “Settled” tells the person reviewing the credit report that someone lost money on your account. Paid in full will rebuild credit faster than settled.

8) Declaring bankruptcy or a “consumer proposal” are fatal for your credit history. If the worst happens and you have health problems, lose your job, separate from a relationship etc. and you cannot pay your debts, it is possible that you may have to consider bankruptcy or consumer proposal. What you need to know is the next seven years getting loans/mortgages/credit cards will become increasingly difficult at your interest rates will be higher. Nevertheless, we can help get out of this challenging situation within 2-3 years. Contact us and we will explain what you should do to make sure your future looks bright again.

9) The credit reporting on your credit history is also important. For example, you’ve been using a certain credit card for 4 years and decided to change it with another one because the “rewards” are better. You close the previous card and start using the new one. In this case, you started a new credit history from scratch and your good 4-year payment discipline will no longer have effect in the future. It would be more beneficial for you to have kept the existing card open with minimal to no use. If you have a credit card where you miss a payment or have conflict I would not recommend closing “problem” card. The credit bureau could track positive improvements in your future credit history and see the successful solution of the problem/conflict.

10) Credit Scores are not always as they seem. I often hear from clients: “I have a great credit, my score is 800+”. You may have a high score of 800+, but the financial institutions will not offer you their best products. Another client may have a score of 690 and will get all options. Let’s me explain why this is the case. The first client only has one credit card with a limit of $500 and has been using it for 6 months. This is called a “false beacon” meaning that the credit rating is above 800 however there isn’t sufficient data to examine repayment tendencies. The client has a high score but the financial institution are can see that it is easy to repay such a small amount over a limited period of time. Another client has a credit rating of 690 points, but he/she has been using 3 credit cards with $3,000.00 limit each for more than 2.5 years. This client also repaid a personal loan where the payments were just over $500.00 per month. The credit score is slightly lower because the client needs to buy plane tickets on one credit card last month. This is the ideal client because they have shown they repay their debt on a timely fashion and manage their finances in a proper manner long enough to establish a trend. It is client who would be offered all options available in the market. He/she can claim the best interest rate with the best terms and conditions. I wish you all the best and patience in developing a good credit history, while we will take care of your advantageous options.

I wish you all the best in building a strong credit history. Let us take care of your financial needs and guide you in the process. I hope this information was helpful and hopefully, you will share it with your friends and acquaintances.

My job is to protect your finances!