One of the great myths regulating childhood is the fear that if you do something bad, it will go on your “permanent record.” Unfortunately, for adults, there really is something akin to a permanent record – your credit score – that can help, or haunt, you for years. Here, we look at some of the habits that can land you a low credit score (scores are ranked from 300 to 900, with higher being better) and make it harder to be approved – or force you to pay higher interest rates – for loans in the future.
The number one no-no is paying bills late – or not at all. Your payment history accounts for about a third of your total credit score, so late or missed payments are the most common ways consumers damage their credit scores. If you keep missing payments and the company passes your file on to a collection agency, that’s a major red flag on your report.
Max Out Your Cards
Part of your score is based on your credit-to-debt ratio (also known as credit utilization). The closer your balance is to your limit, the higher the ratio, and high-ratios are a red-flag to lenders. On the other hand, if you don’t use your cards regularly lenders won’t be able to evaluate your credit worthiness. The Financial Consumer Agency of Canada recommends that cardholders “keep your balances below 35 per cent of your available credit limits.” A simplified example would be that if you have two credit cards that each have $1,000 limits and you spend about $600 a month on credit, split your expenses between the two cards and you should be alright.
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Ask For Too Much
Every time you apply for credit, whether it’s for a car loan, mortgage, or a retailer’s credit card, the lender will conduct a “hard inquiry” on your account. Each of these inquiries can lead to points being deducted from your score. And there are other actions that can lead to hard inquiries, including opening a bank account, setting up a utility bill, or even applying for a job.
On the upside, these records are usually dropped from your report after a few months. So if your credit score is moderate to low, it’s best to avoid applying for things like credit cards if you know you’ll be shopping around for a mortgage in the near future.
Bottom Line – You’re Busted
Worst of all, is declaring bankruptcy. If you do, you’ll be saddled with an “R9” rating on your account for six or seven years during which time you’ll find it virtually impossible to sign up for anything other than a prepaid credit card.
Check It Out
There are two major credit reporting agencies in Canada, Equifax and TransUnion and both will provide you with a free copy of your report by mail. Or, you can pay $15 to review a more detailed version of your report online. It’s recommended that you do so at least once a year to ensure the information they have is accurate and up-to-date.