Sometimes in life, things don’t always pan out the way we intend to. There’s always this grand scheme in our head that we think we’ll materialize itself if we simply follow the proper path. Well, the older we get, the more life will throw hurdles at our plan. Eventually our grand plan A will be modified and will become plan A1 which in due time might become Plan « How did I accumulate this much debt and how can I get rid of them?». You find yourself having late payments and creditors intruding in your credit file and ruining it. Leaving a gift that will ruin your life for the next seven years: a poor credit. What is a poor credit and what constitutes a poor credit? I will try to answer these questions and many more on this post.
What is poor credit?
Anybody that has any type of credit with a reputable financial institution needs to be aware of this. Every month, that financial institution reports your payment history to a credit reporting agency. Meaning that if there are payments 30, 60, 90 days late or more, these institutions take that information and generally send it to either Equifax or Transunion. More on these two later in the post. These monthly reports are meant to establish what is called your credit worthiness.
To have a poor credit simply means that your credit worthiness is low and it presents a high risk of default if a credit was to be extended by a financial institution. Only accredited institutions have access to your credit file and solely with your written permission. Any institution that lends money wants to increase the probability of getting paid back. If according to your credit bureau, the risks to default are too high, they will simply not lend anything because it cost a lot money to collect what would potentially be owed to them.
Maybe there were late payments on multiple occasions for 30 days or more? Maybe there was only one late payment for 30 days or more? All these situations affect your credit score and they stay in your file for a very long time. The opposite is also true. Always paying on time will be reflected in your credit file hence more institutions will be eager to lend you money.
Where can I get my credit report?
In Canada, there are two main private credit reporting agencies, Equifax and Transunion. These credit reporting agencies are responsible to keep all your payment history safe and secure from prying eyes. The only time they divulge that information is when there’s a request from either an accredited institution or from yourself. Again, even if it’s an accredited institution, they need to have your written authorization to be able to view anything.
There are two ways to access your credit information. One method is free and the other is not. Send a letter requesting your credit report to either of these entities, they will send it for free. The downside is that it will take more time to receive it. Being pressed for time because for example an application for a car loan was made and you want to know if it will be approved beforehand. There’s always a possibility to go on either of these sites and immediately pay to have access to it.
For security purposes, it’s recommended to ask for your credit report at least once per year. It might have errors/typos in it or your file might be the target of an identity thief amongst other reasons. Any reason is a good one to verify its accuracy.
What do credit reports show?
On your credit report, there’s a plethora of information. This is how it’s usually laid out:
- Name and variations of the name.
- It’s important to confirm the validity of that information in order to avoid a heap of problems if the information is incorrect.
- Current and previous addresses.
- If the address is less than 12 months old, the other addresses might appear
- Current employer.
- Lender usually verify that information as confirmation of employment.
- Revolving accounts.
- Credit cards and credit line are types of revolving account. Types of account where money is readily available provided there’s sufficient credit.
- Installment loans.
- Mortgages, secured/unsecured loans like car loans are types of installment loans. You received a fixed amount and have a set period to pay the full amount including accrued interest.
- Open and closed accounts.
- Credit accounts that were closed in good standing and utilities like cable company might appear here.
- Account payment history.
- The payment history of all your credit accounts except payment history that’s older than 7 years. This is where it shows the 30,60,90 days late or more notices.
- Recent credit and loan applications.
- Credit inquiries for the last 24 months. Usually, it will be separated between soft credit inquiries that do not affect your credit score or hard inquiries that do affect your credit score.
- Collection accounts.
- Here will appear all your unpaid accounts that have been transferred to a collection agency. That information usually stay there for about 7 years. If anything appears in this section, it can be detrimental to your credit report.
- Public records.
- Here you will see things like bankruptcy, foreclosures or consumer proposal.
- If anything appears here, credit will most definitely be denied. A bankruptcy stays in your file for 7 years.
- Here you will see things like bankruptcy, foreclosures or consumer proposal.
How can I improve my credit score?
There are no miracle solution to improving your credit score yet there are easy solutions that can be implemented right now in order to quickly improve your score.
Cancel all the credit you don’t use.
The first thing to do if possible is to cancel all the credit not in use. That includes credit cards, loans and lines of credit. Many times people have told me that they like keeping credit in case of a rainy day and that they seldom used them. Keeping unnecessary credit is one of the worst things for your credit.
The credit reporting agencies view unused credit limit as potential usable credit hence they don’t differentiate between a balance being at zero and the credit limit. Having a credit card with a 5000$ limit on it with a 0$ dollar balance, the credit reporting agencies will still view it as a 5000$ liability and it might hinder your potential to borrow more for a mortgage. If there’s no activity on the credit account, it subtracts points from your credit score. Don’t want that to happen? Cancel all the unnecessary and unused credit.
Get a consolidation loan or refinance your property
Not being late on any of your payments but having credit accounts in multiple places are the perfect conditions to use a consolidation loan. Having too many credit accounts is as bad as having no credit accounts at all. To rapidly improve your credit score, centralize all your accounts.
What it means is that if you have a car loan, a mortgage, a credit card, a personal loan and a line of credit, it would be to your advantage to streamline everything. A proper way of streamlining would be to combine car loan, credit card, personal loan and the line of credit into one bigger loan with monthly repayment schedule. Then lower your credit limit on the line of credit and use it for emergency purchases or online shopping depending on your habits. Keeping a line of credit albeit with a reduced limit allows you to benefit from the habitual low interest rates that these products usually provide.
I don’t always suggest combining everything into a mortgage because it might cost more in interests in the long run. There are factors multiple factors that need to be taken into account before deciding which solution is best between refinancing your mortgage or taking out a consolidation unsecured loan. Factors like the difference of interest rate between the two product, the term of both the unsecured loan and refinancing option and also the difference between monthly repayment amounts.
Experiencing deeper issues with your credit? Please read my article: How to fix your credit score. It will greatly help you.
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