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It is your financial responsibility -an important one- to keep an eye on your credit score.
Your credit score or credit rating is weighed when you want to borrow money to make a major purchase such as buying a car, taking a mortgage, or applying for a credit card. I have an excellent credit score with my banker and apply many of these tips.
If you have a bad credit score, you may get higher interest rates, may be required to have someone co-sign your credit request, or may have to make a larger down payment on a house if you get approved for a mortgage. So, keeping an eye on your credit score is your financial responsibility and an important one.
Money lenders, such as banks or investors, determine your credit score based on a set of lending experiences they use when they want to decide on issuing credit to you, the consumer.
You can find your credit score in your credit report. The scores range from 300 to 850 points. It is better to keep your score high as that will give you a better credit standing. Many lenders use credit scores to help them decide if they want to lend money to someone.
Do your best to avoid having ‘black marks’ on your credit report as this can help keep you in the black. If your bank account is in the black, it means you have money left in your personal or business account.
Examples of being in debt:
- Someone owes something to someone else, such as money, goods, or services.
- Financial instruments, such as bonds, mortgages, and loans, that indicate a claim to payment and rights of creditorship. Creditorship means being a creditor and being owed money.
- A moral or legal obligation to make amends or submit to punishment for having caused an offense.
A ‘black mark’ implies any evidence on your credit report that may raise a red flag for possible lenders. Some black marks, such as non-payments or late-payments, can have a stiffer impact than others, and a more damaging effect to your credit score.
Black marks on your credit report can weaken your credit score. Credit bureaus (explained below) can keep negative information on you for two to ten years, and bankruptcies for up to seven years.
How to Improve Your Credit Score
1. Fix Errors
Mistakes happen that can result in having your credit request rejected. If you find a mistake on your report, inform the credit bureau without delay. The lender you have approached will be contacted, and if the information cannot be confirmed, the mistake will be removed from your file. Send any correspondence you may have to the credit bureaus to help your case.
2. Pay Down Your Debt
Money lenders weigh how close you are to the limits on your various cards, how much money you owe compared to the credit you have at your disposal, and the number of credit accounts where you have outstanding balances that you still have to pay.
3. Pay Your Bills on Time
If you do not pay your bills on time, including your mortgage payments, you will be charged a late fee, and you may be reported to a credit bureau. Companies have different methods in deciding when to assert that a payment is delinquent.
A payment is considered delinquent when a borrower is late on a payment, such as an income tax, mortgage, car loan, or credit card account. If someone is delinquent, he or she will face penalties, depending on the type of the delinquency, the reason for it, and its length of time.
4. Do Not Request More Credit
Opening several credit accounts, or even asking for them, in a short period of time raises alarms with credit bureaus and financial institutions. This is more so when it is done by people who do not have a credit history for a long time.
5. Know Your Score
You do not have to wait until you have been denied credit to get a copy of your credit report and score. You can order a copy of your credit report whenever you like from the two big credit-reporting bureaus: Equifax and TransUnion.
One bank in Canada I know of that lets you see your credit score for free is the Canadian Imperial Bank of Commerce or CIBC.
6. Use Your Credit
You do not have a credit history if you have never had a loan or a credit card in your name. This can make it difficult for you to get a line of credit (explained below) when you need one as lenders cannot judge how responsible you are going to be with your money.
If they do agree to lend you money, they might charge you a higher interest rate just to protect their money. It is important to use your credit in a regular and responsible way so you can develop a strong credit history.
Impact of Deferred Payments on Mortgage or Credit Card
The current global health crisis related to COVID-19, has forced several banks and money lenders to let borrowers defer their payments on mortgages, credit cards, students’ loans, etc. These banks and money lenders have customized support plans to help individual and small business customers handle financial insecurity.
People ask for mortgage deferral to ease their temporary financial difficulties if they have no income or diminished income due to the global health crisis.
Your circumstances and your overall financial plan should help you decide if you want to seek your lenders’ approval to skip payments for a few weeks or months.
If you defer your mortgage payments, it should not have an impact on your credit rating if you have their approval to defer payments. If you skip a payment without an approved deferral, then your credit score will take a hit.
To avoid confusion, talk to your lenders about your situation and choices. It is better for them to help you make your payments once you are expected to resume paying. It is better for you to know exactly what is expected of you to avoid being punished as blunders might occur.
What Is a Credit Bureau?
A credit bureau, also known as a consumer credit reporting agency, is a company that collects information about your credit history. Equifax and TransUnion are the two major credit bureaus.
The credit bureaus gather credit data from creditors and lenders with which you have accounts and make this information available to third parties in a credit report. But, in the end it is the lender or creditor who makes the decision to approve or reject your credit request. Lenders and creditors have their own standards for rejecting or approving credit requests.
What Is a Line of Credit?
A line of credit is a credit resource offered by a bank or other financial institutions to governments, businesses or individual customers that allows them to draw money when they need funds.
A line of credit can be an overdraft limit, demand loan, special purpose, term loan, discounting, purchase of commercial bills, traditional revolving credit card account, etc. It is a source of funds that can quickly be accessed whenever needed. Interest is paid only on the money that has been borrowed. Lines of credit can be secured by collateral.
What Is Collateral?
Collateral is an item of value used to secure a loan that decreases the risk for lenders. If a borrower does not pay back the loan, the lender can confiscate the collateral and sell it to recover its losses.
Mortgages and car loans are two types of collateralized loans. Other personal assets, such as a savings or investment account, can be used to obtain a collateralized personal loan.
CIBC, Equifax Canada, Wikipedia, Wiktionary, and Investopedia websites.
“Should I Defer my Mortgage Payments?” article. Sheila Walkington. Money Coaches Canada. April 2, 2020.
"Deferred Payments on Your Mortgage or Credit Card? How to Handle the Strain When Payments Restart This Fall." Rosa Saba. Toronto Star Calgary Bureau. July 20, 2020.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.