Part 3: A foolproof guide to building strong credit
Once you’ve pulled yourself out of debt and are moving forward, your goal can be building strong credit for the future. Patricia White, executive director of Credit Counselling Canada, offers the following tips to set yourself up for a positive financial experience:
1. Get a copy of your credit report.
White says this is the first thing you should do to get a handle on your credit situation.
A credit report is a summary of your history of paying off debt. It includes information such as when you opened a credit card or loan account, how much you owe, whether you make payments on time or miss payments, and whether you go over your credit limit. Your payment history on your cellphone and Internet account may also be included.
Once a year, you can obtain a free copy of your credit report by mail from credit reporting agencies Equifax (www.consumer.equifax.ca) and TransUnion (www.transunion.ca.) Online copies are also available, for a fee.
White suggests using both agencies and staggering the timeframes, so that you can get two reports per year. For example: Order your Equifax report every January and order your TransUnion report each June. Each agency has a slightly different scoring system so the reports are not identical, but they will give you a comprehensive picture of your credit standing every six months.
2. Make sure your credit report is accurate.
Even if it’s negative, make sure it’s accurate. Though it may seem tedious, this is a vital step. White explains it’s pretty easy to have someone else’s information end up on your report – it happened to her.
“I have a pretty common last name,” White said. She checked her credit report before applying for a loan one year, and found information in it that wasn’t hers.
3. Do not close credit accounts that have a lot of history.
The idea is to build history, not delete it. White explains, “For example, I’ve had one credit card since I first got a credit card. I wouldn’t close this account since it has a longstanding history of paying on time.”
She says with all the options for credit cards now, people often switch cards to go with one that offers more benefits or different rewards that might suit them better. But think twice before closing an existing one that shows you pay on time.
4. Pay on time.
Whenever possible, pay all your bills, loans and credit card balances when or before they are due. Remember, this information is recorded in your credit report.
5. If you can’t get a standard credit card, consider a secured one.
Secured credit cards are lines of credit that require a cash deposit as collateral. Credit counsellors often suggest them for people who cannot get traditional credit cards and want to improve their credit rating.
After a couple of years of using the secured card and paying the amount charged in full each month before the due date, the financial institution will change it to a standard credit card.
6. Build a good history with low reported balances.
This is where the term “credit score” comes into play. So what is it, exactly?
It’s a number ranging from 300 to 900, with 900 being the best score. Your score is calculated using a mathematical formula based on the information in your credit report. You earn points for actions that show lenders you can use credit responsibly, and lose points for actions that signal you have difficulty with managing credit. The factors used to calculate your score are:
- Payment history – when and what you pay, missed payments, bankruptcy history;
- Length of credit history – how long you have been using credit and paying it back;
- Number of inquiries – how many lenders have asked for your credit report;
- Types of credit – more types (loans, credit cards, line of credit) are better;
- Use of available credit – how much of your credit limit you are using.
This is also where a little-known tip comes in handy: Stay below a 30-per-cent credit utilization ratio on any of your credit cards. This means if you have a credit card with a $1,000 limit, you’ll want to keep your balance at $300 or less.
7. Sign up for credit monitoring.
easyfinancial offers a credit monitoring program that gives you:
- Online access to check your credit report and score;
- Protection against fraud and identity theft;
- Email alerts when there are changes to your credit;
- Monthly credit reports delivered to your inbox.
That’s a wrap on our three-part debt series. The sooner you start applying these tips to keeping your finances healthy, the sooner you’ll get back on your feet to financial success!