To maintain a good credit score, principles remain the same
Know the rules and don’t miss payments
PEOPLE ARE SOMETIMES A LITTLE BIT TOO OBSESSED WITH THEIR CREDIT SCORES. IF YOU HAVE GOOD SPENDING HABITS, IF YOU HAVE GOOD DEBT REPAYMENT HABITS AND YOU’RE PAYING OFF YOUR DEBT, YOUR CREDIT SCORE WILL REFLECT THAT. — PARWEEN MANDER, MONEY COACH
Both a little opaque on how they’re calculated and sometimes painfully clear in what they say, credit scores are an unavoidable part of any borrowers’ life.
But with interest rates already running high, the chance of getting a lower rate thanks to a good credit history is all the more important. Warnings from short-term lenders that they may cut off millions of people with poor credit because the government is lowering the maximum interest rate they can charge adds further importance to having a strong score.
Experts say several products that have gained momentum in recent years to boost credit scores could help, but, overall, the key lessons remain the same.
“My main advice these days is my main advice for 15 years, which is to really, really understand how the score is calculated, and do what it says,” Bruce Sellery, chief executive of Credit Canada, said.
Credit scores are designed to gauge how reliable a borrower is, with only minor differences between how Equifax Inc. and Transunion, Canada’s two main agencies, calculate the final number.
The fundamental inputs are the same. Payment history, including any late or missed payments, and “utilization,” or how much available credit is used, each make up around a third of the total.
Other factors, including credit checks, the mix of credit products, how long someone has had an account, and any public filings of defaults or bankruptcies make up the rest.
Since payment history is such a big contributor, it’s crucial to not skip a minimum payment, Sellery said.
“If you’ve got a credit score you’re desperate to rebuild, then that minimum payment — not the balance, but the minimum payment — comes before all else,” he said.
Sellery suggests automating the minimum payment, so it’s not missed because of forgetting, or because people are having to make incredibly difficult decisions between things like paying bills, or buying food.
“I am deeply aware of the choices that people are making in their lives, and it’s brutal,” he said.
It’s possible to try to increase your credit limit either on an existing card or with a new one, but Sellery warned consumers to be very careful. It only works if you are well in control of spending and won’t use the extra space.
“The pro is that can lower utilization dramatically. The con is it could make your problem way, way worse,” he said.
If the temptation to use the credit is a concern, Sellery suggests some dramatic measures to make sure the extra credit is not misused.
“What you could do is apply for a store card, but you literally cut up that card as soon as it arrives, or you put that card in the hands of your mother and she, you know, puts it in a Ziploc bag full of water and puts it in her freezer,” he said.
People often misunderstand the utilization category, said money coach Parween Mander.
Some people, overeager to boost their scores, will try to max out a credit card and pay it back, to show how reliable they are, but it backfires because credit rating agencies prefer about a third of the available credit used up.
“People think that reflects on their credit a lot better, when in hindsight, it actually doesn’t because lenders don’t like it when they see you are overextending and using up to your credit limit,” Mander said.
It’s also a good idea to check your credit score records to make sure there aren’t any errors or lingering problems like a forgotten bill that’s gone to collection.
Checking your credit score yourself is much easier these days, with all sorts of free options including directly through the rating agencies, banks, or options such as Borrowell or Credit Karma LLC.
Such checks are considered soft pulls that don’t affect your score, but hard pulls, like the kind carried out when applying for credit cards or an instalment loan, should be avoided if possible, Sellery said.
“Do not apply for new credit because the bureaus and the score will take it as you’re in crisis,” he said.
Overall, though, while it’s important to understand credit scores, it’s also good to remember that improvements take time, and having the right financial fundamentals in place is key, Mander said.
“What I find is people are sometimes a little bit too obsessed with their credit scores,” she said.
“If you have good spending habits, if you have good debt repayment habits and you’re paying off your debt, your credit score will reflect that over time.”