Life seems to revolve around credit nowadays with landlords, cell phone companies and employers being one of the many who use your credit score to make important decisions. Originally your credit score was only used to determine whether or not you qualify for credit but now the scope has increased considerably and it can impact many aspects of people`s lives. It is therefore important that you protect it and learn about it.
Learn more about your credit score here (https://petertemple.ca/credit-building/)
Here are 4 things you may not realise will affect your credit:
Debt to Earnings Ratio (DER)
To be creditworthy you need a high credit score and a low debt to earnings ratio. There is no point in having one with out the other.
Your debt to earnings ratio is a measure of your ability to service your debt and of the risk that you may default in your payments. The higher the DER the less is your ability to service your debt and the higher the risk of you missing payments. A high DER will result in a high interest rate or even a loan refusal. Most lenders require a DER value less than 43%.
To calculate your DER divide the sum of all your monthly debt payments by your monthly gross income.
For example if you have a gross income of $5000/month and your credit card payments are $300/month, your mortgage payment $1500/month and your student loan payment $230/month then your debt to earnings ratio is:
($300 + $1500 + $230) / $5000 = 0.41 = 41%
To improve your DER you need to either increase your income or pay down your debts. If your debts are unmanageable one option is to file a consumer proposal The consumer proposal will affect your credit score, which can be re-established, but it will also reduce your debt and allow your DER to be improved. This option may not appropriate for your circumstances and professional advice should be sought before making any decision.
Credit utilisation is an often misunderstood factor which accounts for 30% of your credit score.
Credit utilisation is a measure of how much of your available credit you are using.
For example if you have a $9000 limit on your credit card and the balance on the card is $3000 then the credit utilisation is :
3000 / 9000 = 0.3 = 30%
Ideally your credit utilisation will be less than 30%, so for the above credit card the balance should always be below $3000. It is not sufficient to pay off the full balance on your card at the end of each month, the balance must be kept low at all times if you wish to maximise your credit score.
To work out your overall credit utilisation add up all the current balances on your credit cards and then divide by the sum of the credit limits. For example if you had a $500 balance on a card with a $1000 limit, a $300 balance on a card with a $500 limit and a $2400 balance on a card with a $2500 limit then your overall credit utilisation would be:
(500 + 300 + 2400) / (1000 + 500 + 2500) = 0.8 = 80%
This is way higher than the ideal level of 30% and would negatively impact your credit score.
Closing down old credit cards which you are not using may negatively impact your score as the total available credit will be reduced thus increasing your utilisation ratio.
For example if you had a $0 balance on an old card with a $10,000 limit and a $500 balance on a newer card with a $1000 limit the utilisation would be (0 + 500) / (10,000 + 1000) = 0.05 = 5%
If you close the old $10,000 limit card then your utilisation will jump to 500 / 1000 = 0.5 = 50% !!
Cell Phone Purchases and Contracts
Be careful when shopping around for your nice new shiny cell phone as it may impact your credit!
Each time you apply for a cell phone contract most cell phone providers will check your credit (called a hard enquiry) and if done too many times this will reduce your score. Hard enquiries on your credit bureau represent 10% of your score so do not shop around too much!
Cell phone providers are also now starting to list cell phone contracts as a trade-lines on your credit bureau and late payments will therefore reduce your score. Be sure to make all your payments on time and if there is a dispute regarding a payment do not hold off too long otherwise your score may drop significantly if the account is sent to collections. Ask yourself if it is worthwhile risking a lowered credit score over a disputed payment. The consequences may be higher mortgage payments or higher interest rates offered on future loans.
According to the credit bureaus joint National Consumer Assistance Plan (stemming from an agreement between Equifax, Transunion and Experian to improve credit reporting and become more transparent) it was stated that if there is no contract or agreement to pay then there should be no reporting to the credit bureau. Accordingly parking fines should not report to your credit bureau but some collection agencies through incorrect labeling still manage to report to your bureau thus reducing your score. It is important that you regularly check your credit bureau for errors like this as nobody else will, not the creditors nor the credit bureaus.
Here is a story regarding someone who found out the hard way:
The moral of this story is play safe and pay your tickets on time do not rely on others to abide by the reporting rules.
It can take several years to build up an excellent credit score and it can very quickly be lost through incorrect reporting or due to a minor dispute. Always check your credit bureau regularly for errors and think twice before disputing a bill or fine as it may not be worth it. Should you require advice on credit bureau reporting or any other debtor related matter you may wish to visit the Canadian Debtors Association website at https://debtorsvoice.org/