One of the comments I hear the most often from people is that they wish financial literacy was taught in school. I cannot agree more. The worst of it is when I meet with someone and though they have the employment and the down payment necessary to support the mortgage application, they do not have the necessary credit history and so they are forced to wait while they establish it. So let’s take a look at what you need to do to ensure that your credit is all that it can be.
A quick side note is that this refresher can benefit all of us really. I’ve seen a lack of knowledge about the inner workings of credit affect a wide variety of people.
- The well-established older individual who just hasn’t needed to borrow
- The person who likes to pay cash for all of their purchases
- The spouse who does not work outside the home so all credit is in the partner’s name
- The person who went through a life issue which resulted in either poor credit, an orderly payment of debts or a bankruptcy and needs to start again
- The young person getting started in life
- The New to Canada immigrant
So why do you have to have a credit rating? The fact of the matter is that the days of going into your bank well dressed and on the strength of your relationship with the bank manager you would be offered a loan are long gone. These days you have to have a credit score which is based on how you manage yourself. Think of your credit score as your financial GPA. A mortgage lender is looking for an indicator that you have proven yourself capable of paying your bills on time before they go ahead and lend you the $300,000 necessary to purchase your home.
Your credit score is looked at for all manner of things. From getting a new cell phone, setting up a new utility for your home, loans, credit cards and mortgages. If you do not have a good score you will likely end up paying a higher rate on a loan or a deposit on a utility or cell phone. Without a credit card you will have a much harder time renting a car or a hotel room.
We have 2 credit agencies in Canada. Equifax and Transunion. They collect data from all sorts of companies like banks through cell phone companies. You are assigned a credit score based on how you manage your credit compared to the rest of Canadians. Here is the formula they use.
- 35% Payment History
- 30% Utilization
- 15% Length of Credit History
- 10% Credit Mix
- 10% Number of Inquiries
So here is how you grow great credit:
- Have at least 2 things reporting at all times A credit card and a loan for example
- Make your payments on time every month
- Do not let too many companies pull your credit
- Do not exceed 50% of the available credit limit on your credit card or line of credit
- If you have had some late payments, do not lose hope. Get yourself back on track ASAP so the lenders can see it was an anomaly and not normal for you
- Each partner in a relationship needs to have their own credit. Make sure all joint accounts report for you both.
Credit in and of itself is not a bad thing as it is so often portrayed. Good credit management is a necessary thing and knowing how to navigate is a necessity in our modern world. Need more advice? At Dominion Lending Centres, we’re here to help!
Thank you to my DLC colleague Pam Pikkert for this article.