With thanks to Brandie Weikle who wrote this in the great newsletter Moneysense, on Sept 11, 2019
“You’ve never missed the rent or been hounded by collection agents, so surely you’ve got stellar credit, right? Not necessarily.
There’s more to a good credit rating than simply paying the bills on time, explains debt counsellor Brian Betz of Money Mentors, a non-profit credit agency in Calgary. While that counts for 35% of your score, which is calculated within a range of 300 to 900, the other determining factors break down as follows (and you’ll find more detail below):
- 30% credit utilization
- 15% length of credit history
- 10% the number of credit inquiries on your report
- 10% the types and variety of credit you have
A score of 800 or more is excellent, 720 to 799 very good, 650 to 719 good and 600 to 649 fair. If your credit rating is between 300 and 599, lenders will consider you a poor bet.
Being on top of the lesser known elements of credit can help you avoid nasty surprises, like being declined for a car loan or mortgage, or not qualifying for the best rates because of so-so credit.
Here’s a look at some of the common ways smart people are hurting their credit ratings and how you can improve yours.
1. You’re using too much of your total available credit
After paying accounts on time, the next most important element of your score is called credit utilization. This is the amount of your total available credit that you’re currently using, and it counts for 30% of your score. If you keep your credit cards and line of credit just shy of maxed out—making mostly minimum payments—lenders won’t be inclined to give you any more, says Betz.
Credit fix: Find additional funds to pay down these balances. Look first to your fixed expenses, says Shannon Lee Simmons, a certified financial planner in Toronto and author of Living Debt Free. “If you’re able to get rid of cable or a couple of subscriptions and raise a $100 a month between those, you can just replace it with automatic payments very easily. A little bit does go a long way.” Using online banking, it’s easy to set up an auto payment to ensure that extra $100 doesn’t just get eaten up by everyday spending at the grocery store or coffee shop.
2. You’re not demonstrating enough credit history
Naturally, lenders are more confident about applicants who have a traceable history of paying their bills. This represents 15% of your score. You begin to build credit the first time you have a cell phone in your name or use a credit card, and the longer you have an account, the better. What a lot of people don’t realize is that closing an old credit card you no longer wish to use can damage your credit by shortening your history.
Credit fix: “Typically what we say to clients is that if you have two credit cards and you only need one, then keep the one that you’ve had the longest,” says Betz. If a newer credit card has a rewards program or fee structure that better suits your needs, use that one for most transactions and—since some credit card companies suspend older cards if they go months without transactions—the old one for just your music streaming service or some other small subscription.
3. You’ve avoided credit cards altogether
In the same vein, Simmons says she’s had clients who are so concerned about debt they don’t have a credit card* at all. While that sounds like the most responsible choice—no card, no high-interest spending spree, right?— it often backfires. “If they’re trying to rent an apartment for the first time or do anything like that, they’re really having a hard time.”
Credit fix: Simmons recommends getting a credit card with a low maximum balance of $500 or $1,000 and using it to automate payment of a cell phone bill or Netflix subscription.
4. You’ve made too many applications in a short time
Another 10% of your credit rating hinges on whether there’s been a lot of credit inquiries in a short period of time. “There are allowances made if you’re shopping for a car and there’s five inquiries for that particular transaction,” says Betz. But if you’re applying haphazardly for various loan products, that signals to the bureau that you may be in a financial bind.
Credit fix: Be mindful; don’t apply for a new card or loan unless you really need it. Best to avoid promotional offers at retail stores for a special discount off your purchase if you apply for a store card on the spot.”
5. You don’t have enough types of credit
The final 10% of your credit rating is based on the types of credit you hold. The bureau would rather you have a mortgage, line of credit or car loan than just a handful of credit cards.
Credit fix: If you only have cards, you may wish to add a line of credit and move some transactions there.
6. You don’t have a credit card with a major bank
Similarly, while credit cards are among the best tools for demonstrating and building good credit, they’re not all considered equal. Canada’s big six banking institutions are also known as “Schedule A” or “Schedule 1” banks. “More weight is given to a schedule A bank than a store credit card,” says Betz. The credit bureau knows there’s a guy at the grocery store who’ll track you down in the dairy aisle and set you up with a card—even if your credit is mediocre.
Credit fix: Ensure you have a major bank credit card in your name. Banks are choosier about their credit customers, so those cards raise your score faster.