Want to raise your credit score in Canada? Avoid these 5 credit card mistakes
Believe it or not, paying off your credit card too fast can hurt your credit rating. Here’s what you can do to help fix it. ADVERTISEMENT What is a credit score, and how does it affect your personal finances? Anytime you apply to borrow money, whether it’s a loan, a line of credit or a new credit card, lenders look at your credit rating—and your credit score is a big part of that. What is a credit rating? Your credit rating is made up of two parts of information—your credit report and your credit score—and each plays a specific role. Along with some personal information (your name, address, birthdate, employment details and when you last applied for credit), your credit report contains a list of companies that have inquired about your credit history, and that you’ve obtained credit from. This list of your credit obligations shows how you use credit on an ongoing basis, including when you opened the account, your credit limits, the outstanding balance, if you pay on time, how often you make late payments and if anyone is joint on the account. If any of your debts are in collections, they will show in a different part of your credit report with more detail. If you’re curious to see what’s on your own credit report, take a look. In fact, everyone should check their credit reports (yes, you have two of them in Canada) once a year for accuracy. You can get your credit report for free (and you might be surprised by these 7 things that are not on your credit report). Your credit report will also include your credit score. Your score is actually a ratio that indicates to a potential lender how likely you are to repay any new loan they give you, based on how you’ve handled credit in the past. For example, if your score is 680, that tells a lender that for every 680 out of 900 people whose situation is scored the same as yours, 680 are likely to repay the money they borrow. It stands to reason that the higher your score, the more likely a creditor will lend you money with favourable terms and conditions. As such, your credit score is very sensitive to changes in your financial situation and in how you use credit. Avoiding these five credit card mistakes will give you less to worry about when it comes to your overall credit rating. Making your payments late Have you ever lent money to a friend, only to have to chase them down to get back what they owe you? Credit card companies are often in that same position—and while they might not feel like a friend, they most definitely want to be paid as you had agreed to do. Late payments with credit cards will cost you big-time. In addition to interest charges at the current rate in your credit card agreement, depending on how late you pay and how often it happens, your interest rate can go up, fees could be tacked on and your balance owing can quickly grow out of control. In the same way compound interest (interest on interest) can be good for your investments, it can be terrible for your debt level. The fix: Debt payments shouldn’t be something you get around to after spending on non-essential items—they should be your primary essential payment. Make a list of the payments you need to make each month and ensure you are able to pay the required amount using the money you have coming in (ideally more than the minimum, where applicable). Then, set up calendar reminders so that you make your payments on time. If you’re very disciplined, you could go a step further and set up automatic payments through your online banking system. By setting up the payment yourself, rather than allowing your credit card company to take the payment on your due date, you maintain control over your bank account should an unexpected expense, like a car repair, come up Using too much of your available credit A close second on the list of credit card no-nos is using more than 10% to 30% of your available credit on an ongoing basis. This means that if your credit card’s limit is $5,000, try to keep the amount you owe at less than $1,500 (representing 30% of the total available credit), even if you are “just” collecting points or if you pay it off in full every month by the due date. The reason for this is simple: The more you owe, the more trouble you would have paying it off should something unexpected happen to your source of income. When we apply for credit, the application is processed using our gross (before-tax) income. When we use the credit granted to us, we only have our net (after-tax) income, which is considerably smaller, to work with. The fix: We know what you’re probably thinking—but not so fast. Raising your credit card limit is fine only if you can afford it and if you don’t plan on applying for additional credit any time soon. When you apply for credit, lenders know there is only so much you can afford to repay. They reduce how much they’re willing to lend you based on the overall limits of credit products you already have. For example, if it’s a mortgage or car loan you’re applying for, you might be offered a smaller amount of principal than you requested if you have too much other credit available, meaning that you’ll have to house or car shop at a price point lower than you’d anticipated. The real fix is working on paying off your debt so that sticking to below that 30% usage mark on each credit card still lets you buy what you need, and a few well-considered things that you want. Treating your credit card like an ATM Did you know that if you take a cash advance from your credit card, the interest rate is higher than if you charge items to your card at a point of sale? What’s more, there is no interest-free grace period with cash advances (interest is charged right away), you don’t collect reward points on cards that have a loyalty program, and you might even have a limit for how much cash you can take versus charging purchases within your overall credit limit. Taking cash advances can also signal to potential lenders that you have a cash-flow problem with your household budget. The fix: The simple answer is not to do cash advances on your credit card. If you didn’t realize how they worked, check your credit card terms and conditions to find out more, because each card can be a little different. However, if you routinely find yourself falling short with expenses that must be paid in cash (for example, daycare or rent), it’s time to take a serious look at your budget; your credit rating might be the least of your worries. You likely need more help with your money and debts than this five-point tip list. You can get more information and some guidance by contacting a non-profit credit counselling organization in your area. Applying for more credit cards than you need Have you ever applied for a credit card at the till to save 10% on your purchase, or walked through a store and filled out an application to get the free gift? Every time you apply for credit, an inquiry is registered on your credit report. While a few inquiries at different points in your life are only natural, and acceptable, continually shopping for credit is not. When you apply for a lot of credit cards in a very short period of time to see what you might get approved for, that is considered shopping for credit. All of the inquiries work against your overall credit rating and, worse, the credit cards granted to you can lead to an unaffordable amount of temptation spending. The fix: Apply only for what you need and can afford. Accurately determining what you can reasonably manage requires a household budget that accounts for all of your monthly, occasional and annual expenses; long-term savings; and debt payments and obligations. Paying your credit card off too fast Is that really a thing, paying credit cards off too fast? It certainly can be. If you are worried about getting into debt with a credit card you might decide to pay it off as soon as you use it. From a money management perspective, that works; however, in terms of using the credit card to build a credit rating, you’re not doing yourself any favours. The fix: Wait until the bill comes and pay it in full before the due date each month. This allows the credit scoring system to see that you’re using the card, and by paying it off before the due date you aren’t charged any interest. There are a few ways to ensure that you have the cash ready to pay your bill. One is to set up a separate bank account for payments. Rather than paying off your credit card immediately, transfer the money directly to the separate account. Then, when the bill comes, you’ve got your payment ready. A second easy way to use a credit card and not end up in debt is to pre-authorize a recurring bill payment to your card (for example, a monthly subscription) and then tuck the card away at home. This way, you’ll know how much of a bill to expect every month, you can account for it in your budget, and you could even set up a recurring credit card payment from your bank account to ensure it’s paid on time every month. If you want to build or rebuild your credit rating with a credit card, it’s essential to use the card, but you don’t need to use it a lot. If you’re concerned that your bad credit is hurting you, just be aware that there is no “hack” for fixing a credit rating fast. So rather than worry about what you can’t control, focus on what’s within your control and on what you can change. It’s never too late to establish a spending plan or break up with your credit cards for a few months to help yourself get on track again. Scott Hannah is the president and CEO of the award-winning, non-profit Credit Counselling Society, which has helped more than 600,000 Canadians since its inception in 1996.
How to build credit history in Canada
Tenants are paying a lot in rent every month. Here’s how you can use your rent payments to build your credit history and credit score. Being a young adult may afford you the freedom to live on your own. But for most people, that means renting a space—more than 80% of individuals aged 25 to 29 are renters. What’s more, younger Canadians who live in urban areas make up the largest group of renters, according to a study by RBC. As you start your career and put money into your savings account, you’ll soon realize your credit history and credit score are important factors in getting approved for credit products. For instance, if you want a credit card, car loan, line of credit or mortgage, you’ll need a credit history and a decent credit score to prove to lenders that you will reliably make payments on time. In the past, Canadians weren’t able to build their credit through renting. Fortunately, in recent years, new programs have launched to help renters build their credit history. Here, I’ll share how you can apply for these programs to help you reach your financial goals and become established later on in life, like buying a home. (Read: Renting vs. home ownership: Can you be financially secure without buying?) How does rent reporting work? Rent reporting is the process of sharing your rent payment history with the Canadian credit bureaus, Equifax and TransUnion. Your monthly rent payments show up on your credit report, and this vital information contributes to the calculation of your credit score. (If want to know your credit score, both Equifax and TransUnion offer free credit reports). Unlike with bills for a cell phone, credit card and utilities, rent payments aren’t typically reported to the credit bureaus. You have to sign up with a rent reporting service in order to have this data shared on a monthly basis. We can all agree that tenants do not want to be evicted because of late payments—it’s the reason many will prioritize their rent payments over other bills and expenses. And it’s why having this data shared with the credit bureaus can be beneficial in creating a credit history and boosting your credit score. However, know that your score can be negatively impacted if you miss a payment when using rent reporting services. Programs to help renters build credit Today, Canadian tenants are paying exorbitant amounts for rent. In fact, the national average rent inched to a record of $2,117 per month in August, according to Rentals.ca. Without a doubt, if you’re paying your rent on time, it’s worth the time and effort to have that stellar track record appear on your credit report. Here are a few noteworthy programs you can use to do this in Canada. Landlord Credit Bureau (LCB) The Landlord Credit Bureau (LCB) is a credit reporting agency that allows tenants and landlords to report rent payments to Equifax. Both the landlord and tenant need to be involved in this process. The incentive for renters is that it encourages them to pay their rent on time to prevent evictions and build their credit history, while landlords can see these reports for screening purposes. Tenants have to sign up using the rent reporting platform FrontLobby. The company’s Basic plan is free and includes recording and tracking your lease details with your landlord. The Plus plan is $4 per month and includes reporting your rent payments to Equifax. Chexy The Toronto-based startup Chexy allows tenants to pay rent with any major Canadian credit or debit card, and to build credit and earn rewards in the process. Plus, you don’t need to involve your landlord. When you create an account, all you have to do is upload your lease and enter your rent amount and due date. Then you connect your Canadian debit or credit card (Visa, Mastercard and American Express are all accepted). Your card is charged every month and Chexy e-transfers your landlord. The service costs $1 per month if you pay with a debit card or 1.75% of your rent if you pay with credit. However, if you want your rent payments reported to Equifax, you’ll need to sign up for Chexy’s Credit Builder program for $9.99 per month (you can get a promo offer of $7.99 per month at the time of writing). If you opt to pay by credit card, you can use the company’s online calculator to see how many rewards (such as cash back and loyalty points) you will earn with the major credit card providers. Borrowell’s Rent Advantage program The Rent Advantage program offered by Borrowell allows tenants to report their rent payments to Equifax. Similar to Chexy, you aren’t required to involve your landlord. When you sign up for an account, you provide your lease information and connect your bank account or credit card information (Visa, Visa Debit, Mastercard and Debit Mastercard are all accepted). The service is available for $8 per month and you can cancel at any time. In addition to the Rent Advantage program, Borrowell allows you to compare credit cards, as well as mortgage and insurance rates. By signing up, you can access your credit report and credit score for free. More ways to build credit If you’re looking to level up your financial profile, there are other options to build your credit history and credit score from scratch. Here are a few strategies to consider. Use a secured credit card If you’re a newcomer or fresh out of school, you may not have enough credit history to be approved for a traditional credit card; you may want to consider some of the newcomer and student credit card options available. Alternatively, you can get a secured credit card that requires a cash deposit that is used as collateral. A secured card can help you build or improve your credit score, but you’ll still be responsible for making payments on time and in full or else interest will accrue. Obtain a credit builder loan If you’re looking to get a small loan without an established credit history, a credit builder loan is an option. With a traditional loan, you get the money upfront, which you must then repay with interest over a fixed period of time. With a credit builder loan, the money you pay upfront is put aside for you, but you cannot access it right away. You make fixed monthly payments that include interest over a specified term, and the money is released to you in increments or in full once the entire loan amount has been paid. Credit unions, small banks and online lenders offer credit builder loans. These loans charge high interest, so be sure you can make your payments on time. (Did you know there are loans created specifically for paying rent in Canada?) Get a cell phone plan Having a post-paid cell phone plan can help you build your credit. When you make your payments, the major cell phone providers will report this to the credit bureaus. Be sure to pay on time and in full so that it positively affects your credit score. Patience is a virtue Rome wasn’t built in a day and neither will your credit history and score. Learning and mastering different credit building techniques will take time. But building good financial habits now will help you down the road when you’re looking for the offers on credit products or to get approved with a new landlord. Hopefully, with the above tips in mind, you’ll be well on your way to getting the credit you deserve.
The risks of credit repair companies in Canada
Credit repair companies may claim to solve Canadians’ debt problems quickly and easily. However, you can’t “repair” credit—only rebuild it. In this article, we’ll discuss how. Getting your credit in order is an important part of managing your personal finances. If you have a less-than-perfect credit score and are struggling to get approved for a credit card, mortgage or other line of credit, you may be tempted to use a credit repair service. Some companies claim they can repair your credit and solve your debt problems quickly. However, you can only rebuild credit and there’s no quick fix to do so. We’ll walk you through why you should be skeptical of companies offering credit repair services and explore other ways to rebuild and maintain strong credit. The importance of strong credit in Canada It’s important to have a good credit score so you can get a loan, be approved for a credit card, buy a home and a car. And you want to get the best interest rates when doing so. A credit score may also determine whether a landlord approves your rental application, and employers might even consider credit histories in their hiring process. Having a strong credit score shows you are good at managing debt and credit. In contrast, bad credit suggests you are a risky bet to lenders because you may be having problems with money. Why someone might reach out to a credit repair service The average Canadian owes more than $21,000 in consumer debt. When you have a lot of debt and other monthly bills to take care of, it can become difficult to manage and make all of your payments on time, especially amid high inflation and rising costs of living. However, if you don’t manage your payments on time, your credit score will take a hit. Feeling desperate in a financial situation can cause anyone to make a bad decision. But many people run into further financial problems by trying to repair their credit with a quick fix. How credit repair companies work Credit repair companies say they will repair your credit by removing negative information from your credit report, thus boosting your credit score—for a costly, upfront fee. They may also offer to negotiate with credit reporting agencies to improve your credit score or encourage you to take out a high-interest loan to pay off your debts. Be aware that these credit repair companies make money from fees, set-up costs and interest, so you may be left with even more debt without any changes to your credit score. These companies often take advantage of the fact that many Canadians don’t know you can’t remove accurate information from your credit report—even if it’s bad. You should be skeptical if a company says they can remove accurate, negative information from your history. Pay attention to the warning signs Many Canadians run into further financial problems as they attempt to “repair” their credit because they fall victim to credit repair scams. Credit repair services are different from not-for-profit credit counselling agencies. The latter are typically a free service offering non-profit financial education and advice. But back to the scams, here are the warning signs that a company offering credit repair services is likely a scam: They request an “upfront” payment (this is illegal under Canadian consumer protection laws) They offer instant approval for loans or other credit products without fully understanding your financial situation They call themselves a “credit repair company” They request payment by gift cards They use high-pressure sales tactics They say they “erase” your negative credit information They don’t provide a transparent contract (or any contract at all) They warn you against contacting a credit bureau How to rebuild your credit in Canada Accurate negative information on your credit report cannot magically go away; it’s there until it falls off your credit report, which takes about six years. If your credit report isn’t great, the only way you can go about “fixing” it is by rebuilding it with a positive credit history. You have to show your creditors that your financial habits have improved, which takes time. Here’s what you can do to get the ball rolling: 1. Review your credit It is important to review your credit report regularly by getting a free copy of your credit history from both Equifax Canada and TransUnion. Look over the report to see what’s documented and if the information is correct. For no charge, you can remove incorrect information by filing a dispute with the credit reporting company. 2. Work to pay off your accounts Instead of paying for a credit repair company to fix your credit, use those funds instead to work towards paying down your debt. Put the most money toward paying down unsecured debts first, such as payday loans, credit cards and/or personal loans, as these tend to have the highest interest rates. You’ll have to keep making payments on all other secured debts, but these tend to be considered “good debts” because they yield future value. 3. Make minimum payments by the due dates Late payments have a negative impact on your credit score, so be sure to make at least the minimum payments each month for each debt you currently have. A history of consistently paying down debts can be a good starting point for rebuilding your credit. 4. Contact a non-profit credit counselling agency If you aren’t able to contact creditors on your own or get current on your payments, you can contact a not-for-profit accredited credit counselling agency, like Credit Canada. Credit Canada offers free credit counselling services from certified credit counsellors to support you through various debt-relief channels. 5. Create and follow a budget It is crucial to stay on track with your finances to avoid missed payments, as those can lead to a decreased credit score. There are many online budgeting tools and apps that can help you establish a realistic spending plan, including Credit Canada’s free Budget Planner + Expense Tracker. Here’s a step-by-step guide to help you create a budget. Remember, the key to a successful budget is sticking to it. 6. Get a secured credit card A secured credit card can help you build your credit score without paying interest or fees to a credit repair company. How it works is you put down an initial deposit that determines the amount of credit you’ll have. The bank or lender then keeps this money in case you fail to make your payment. But keep in mind credit shouldn’t be used to replace money you don’t have, so be responsible with it. Maintaining good credit history When working to rebuild your credit, remember to be patient. You have to maintain good financial habits over time for your credit history to show improvements. There aren’t any magical solutions for getting rid of past bad debt, regardless of what credit repair companies advertise. Simply correcting any information you can, paying down your debt, and making payments on time will cause your credit score to rise. Get debt relief with Credit Canada If you need guidance and support with debt repayment or any other credit inquiries, contact one of Credit Canada’s certified non-profit credit counsellors today for free, confidential advice. ADVERTIS
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