Season Livingston
Last time I promised to talk to you about your credit. There are three scenarios I want to cover as not everyone is in need of fixing bruised credit. Some of you may just want to increase your already good credit and some of you are new to credit and may just need some advice on getting started. I’ve highlighted the credit tips that everyone can gain from through understanding.
Let me first say that I have a distain for this topic, not because it isn’t important or helpful to know, but because everyone has different ideas of how credit works and they are always very passionate about it. The truth is what works for one person does not necessarily work for another. There is good and bad information out there on the subject of credit and when you work in the mortgage industry you hear all of the different theories and advice that people have gotten over time, some good and some bad. That is why this article is going to be general and provide solid advice that will work for the masses so that it can help as many people as possible. So let’s get started.
Credit Tip #1: Get a free credit report
The best place to start is to contact Equifax and request a free credit report to see where your credit sits now and to find out what needs to be worked on or improved. It can be a very simple process; you go to their website and instead of paying for a full credit report, go to the “request a free credit file”, fill out the form and mail it away. Within a few weeks they will mail you your credit file.
The free credit report will not have your credit score, as Equifax will want to charge you for that feature, but the free report will give you enough information to get you started. If you find the credit file confusing to read; simply use Google and search how to read a credit file and you will find numerous web guides that can walk you through it.
Now that you have reviewed your credit profile it is time to determine which method of credit improvement is best for your circumstance. I’m going to cover four different scenarios and most people will fall into at least one.
Credit Tip #2: Reduce the number of open credit cards to only credit cards used often
If you are a person with great credit, yours is the easiest scenario to cover and the generally easiest to help as small changes can improve your already good credit rating.
One of the easiest tips is to reduce the number of credit cards to only the actively used cards. Reducing the number of credit cards on file can help you improve your credit score by reducing the amount of available unused credit. For example, maybe you have six active credit cards but only use two of them on a monthly basis. These four stale credit cards could be sitting on your credit file reporting as non active. By reducing the number of cards you have, you simplify your credit reporting as well as simplifying personal credit card management. In addition, some credit cards have annual fees which are charged whether the credit is used or not. Don’t pay annuals fees that you don’t absolutely need.
If you are not using all of your credit cards, maybe reduce the amount from six to four or reduce the number even further down to the two active credit cards. As long as you have other things working for your credit on a monthly basis, such as a line of credit or mortgage, these four extra credit cards are not improving your credit report.
Credit Tip #3: Reducing the amount of overall debt will always increase a credit score
Another counter intuitive tip is that the amount of debt you have is not always directly related to your credit rating. You can have a great credit score and still be in debt. I would never advise someone to carry a balance on a credit card or line of credit because some think that this will improve your credit score, when in actual fact you are only paying unnecessary interest. If you have debt, the best advice will always be to work on paying it down and not gaining more as this will also help you get a higher credit score. It shows that you know how to pay off debt and not just live with it.
Credit Tip #4: Set up automatic payments and always try and pay more than the minimum amount that is due
Let’s now talk to the people that have hit a rough patch. You are normally great with your credit but had a 6-month span where things took a down turn and you were not on top of your finances. You are also very easy people to help, as paying on time will largely help these type of situations. Take advantage of today’s technology and change your manual payments to automatic withdrawals when payments are due so that you never miss a minimum payment. If you can, set it up to pay your monthly balance in full so you never accumulate debt. If that isn’t achievable set it up to withdrawal the minimum amount due monthly and then manually pay as much as you can to pay down your debt. This way you will never be reported as a late payment and when you are on top of things, you can slowly rebuild new credit with no blemishes.
Credit Tip #5: Getting into credit, new to credit
In the case of people who are new to credit, acquiring new large sums of credit, such as a car loan, high limit credit card or home mortgage, can be challenging without past credit history. But many of the banks will not give new credit to people with no past credit. If you have been with your bank for a long time you can try and obtain credit for the first time directly, but most of the time that still does not work. You can however, get credit cards that specialize in this type of credit. With time and smart use of your available credit, you will slowly work your way into a better situation where you can then get larger loans like lines of credit and other loans.
Credit Tip #6: A RRSP loan can help build credit
Another way to build credit is to speak to your bank in regards to acquiring a Registered Retirement Savings Plan (RRSP) bank loan. It isn’t for everyone’s situation but it is an option. You essentially receive a loan from the bank that goes directly towards RRSP investments. As you pay your monthly loan payment to the bank, your activity is reported and establishes a record of credit activity. This can help you in two ways; you can build your credit history and invest in your future at the same time.
Credit Tip #7: Don’t use credit unless you can afford to pay it off immediately
With people that are new to loans and credit I always recommend only getting approved for a credit amount that you can afford. What I mean is only use your credit card as a substitute for something you would be using cash or your bank card to pay off immediately. This way you use the money you already have set aside while building your credit at the same time. Don’t get into the habit of buying things now with credit that you can’t afford and then have to wait to pay them off later when funds become available.
Credit Tip #8: If impacted by bankruptcy or credit counseling, start rebuilding credit immediately
Now to touch base on how to bounce back from credit counseling or bankruptcy. I find that most people in this situation take a long time to start rebuilding their credit because they are nervous that it can happen again. This is not a smart move. You should start rebuilding your credit with help from someone who knows what they are talking about.
It takes two years to fully rebuild your credit after bankruptcy. So don’t wait and be smart with the decisions that you make. Just like new-to-credit applicants, start small and use only what you can afford and have budgeted for. Only use your card as a substitute for cash purchases that you buy every month like gas or food. Use the credit card at the store and immediately transfer funds by phone when you get back into your car or online when you get. This way you are using your credit and building clean credit with no chance of being late or falling into debt again.
Credit Tip #9: In order to rebuild credit two sources are required, utilities and monthly bills do not count
You need two credit lines to fully rebuild. Your cell phone or utility bills do not qualify. Try to get two different credit cards as most of the time this is the only thing you will qualify for after bankruptcy. Remember you do not need to hold a credit balance to build good credit. The lender wants to know that you are a good investment and that you will give their money back eventually. Your credit score is like a credit report card, it allows lenders to see how good or bad you are at managing credit. The more confident they are in your ability to be responsible and pay them back, the more likely they are to invest in you with their money.
In summary, with all the tips listed above it’s important to note that each person’s credit is unique and can be difficult to navigate when you don’t have the knowledge or past experience. There are always financial experts who can help you if you are not sure what to do next. I hope that the information that has been given here can help clarify some of the misconceptions or uncertainty you may have had and reaffirm that your current process is working.
I may not like talking about credit in the high level general sense but when it comes to helping people get on the right path that is where the true appreciation for how credit works really comes into play. If you have questions or need advice on your credit journey email me at mortgageminutepe@gmail.com, and stay tuned to next time when I will go over investment properties. Let’s help you take that step.
