The ability to “buy now, pay later” is something most Nova Scotians take for granted, but many don’t stop to think about their own personal credit score — or have ever checked it themselves.
Senior Mortgage Advisor Clinton Wilkins with the Clinton Wilkins Mortgage Team says a person’s credit includes everything from credit cards and lines of credit to car loans, cell phone accounts, utility accounts, mortgages and collection items.
It’s something he thinks about a lot, since credit is one of the three major checkpoints involved in securing a mortgage — along with income and assets. But even if you already own a home, it’s critical to maintain good credit.
As part of our coverage for Financial Literacy Month, let’s talk about how your credit comes into play …
WHAT DETERMINES MY CREDIT?
Your credit is based on three things:
- Your account balances
- How close you are to your limits
- Your repayment history
It’s also affected by your mix of accounts — installment accounts versus revolving accounts — and if you’re borrowing from alternative lenders (money-lending institutions, for example) or more traditional lenders, like banks and credit unions.
WHY DOES MY CREDIT MATTER?
Bad credit can prevent you from getting a mortgage, being approved for a credit card or signing onto a new cell phone plan, but it can also affect things that go beyond borrowing — like renting an apartment or getting a job.
Clinton says sometimes people don’t bother checking their credit because they either think it doesn’t concern them — after all, they’re not applying for a loan or a mortgage — or they simply don’t want to look in case the news isn’t good.
“It can feel daunting because nobody really wants to talk about credit, but there are so many misconceptions about it,” says Clinton. “Some people assume their credit’s great and it’s not, and sometimes people assume it’s bad but it isn’t. That’s why it’s so important to know for sure.”
HOW CAN I CHECK MY CREDIT (FOR FREE)
If you’re not familiar with your own credit score, Clinton says Financial Literacy Month is the perfect opportunity to check it — which is free and easy to do.
There are two credit reporting agencies in Canada: Equifax and TransUnion. Each agency offers paid services — like credit monitoring — and deals with Consumer Relations to address any credit errors (which happen more often than you might think).
If you want to check your credit for free, Clinton always recommends two free apps for his clients: Borrowwell (available in the App Store and Google Play) pulls in the results of Equifax, and Credit Karma (available in the App Store and Google Play) pulls in the results of TransUnion.
Both of these free apps will even send you notifications about credit inquiries and provide tips on how you can improve your credit. Logging into either app won’t impact your credit score because it’s considered a “soft inquiry.”
HOW’S MY CREDIT? (out of 900 points)
- GREAT: Score over 720
- GOOD/FAIR: Scores between 600 and 720
- PROBLEMATIC: Score below 600
HARD CREDIT INQUIRIES VS. SOFT CREDIT INQUIRIES
You can check your bank balance as often as you’d like, but checking credit is different — some checks can potentially hurt your credit, even if it’s good to begin with.
A “hard” check is when you’re applying for new credit, and this kind of check shows up in your credit bureau.
“These inquiries look like you’re seeking credit and not getting approved for it, so it negatively affects your credit score,” explains Clinton. “Don’t do these checks unless you’re planning to take on the credit if you’re approved.”
While 10 per cent of your credit score is affected by hard inquiries, the other 90 per cent of your credit score is determined by how you’re using your credit — like if you’re making payments on time and keeping your balances low.
HOW DO I IMPROVE MY CREDIT?
So what happens if your credit score isn’t too hot — somewhere below 600 points? How can you improve it?
Clinton says any derogatories remain on your credit bureau for six years. You can wait six years for any issues to “fall off,” or you can address them by talking to the creditor, paying off the debt or setting up a repayment plan.
“If you’ve had credit challenges in the past, that doesn’t mean you’ll have bad credit forever,” says Clinton.
If you’re dealing with financial hardship and you’re in over your head with your credit, Clinton says it’s best to talk with a financial professional to see if a bankruptcy or consumer proposal is a good idea.
HOW DO I BUILD (OR REBUILD) MY CREDIT?
Whether you’re just starting out as a brand-new adult or starting fresh as a more experienced one, there are specific steps you can take to build good credit.
Clinton says the good credit rule of thumb is 2-2-2.
- Two years’ history
- Two accounts
- Limit of at least $2,000 in both
It’s best if one account is a revolving account (like a credit card or line of credit) where you keep the balance below 30 per cent, while the other account is installment credit (like a car loan) and you always make the payments on time.
WHAT DOES MY CREDIT NEED TO BE TO GET A MORTGAGE?
As of this past July, the Canada Mortgage and Housing Corporation (CMHC) tightened their debt servicing requirement and began insisting on a minimum credit score of 680. The average Canadian has a credit score of 650, but that doesn’t mean they can’t secure a mortgage. For normal prime lenders, the minimum credit score is 600. If your credit score falls below 600, you may be able to secure a mortgage with a higher-cost alternative lender.
If you’re interested in getting a second mortgage — perhaps investing in a rental property — Clinton says having an existing mortgage can help or hurt your chances, depending on your credit as a whole.
“Missing payments on some credit accounts may not be the end of the world, but if you’re seeking mortgage financing and you have a mortgage already, they don’t want to see any missed payments,” says Clinton. “Show them you never miss a payment, and they’re all on time.”
DOES MY CREDIT MATTER MUCH ONCE I ALREADY HAVE A MORTGAGE?
If you’ve secured a mortgage and you don’t plan on applying for credit cards or lines of credit anytime soon, does your credit score really matter?
“Sometimes mortgage lenders will check your credit at renewal time, and it can affect your renewal offer,” says Clinton. “We’ve seen clients who were offered higher rates at renewal time because they’d run into credit challenges, so you should always seek the advice of an unbiased mortgage professional to make sure you’re in the best possible financial position on a go-forward basis.”
November is Financial Literacy Month. This was our deep-dive into credit, and we’ve already explored income and assets, so check back for our next instalment that focuses on managing financial pitfalls leading up to the holidays.
Already have a mortgage? Now could be a smart time to secure a lower interest rate.
3 credit habits that you need to break
Are you using your credit card responsibly? Or do you have a few bad habits? Take a look at three common bad habits that people have with their credit cards and the best ways to stop doing them.
Habit 1: Pushing the limits
The first bad credit habit is pushing your outstanding balance close to its limit. What’s wrong with that? The first problem is that you’re giving yourself a larger debt load to contend with every month — one that accumulates interest the longer that it sits. It could be very difficult to pay down, and it could even lead to you maxing out your card.
The second problem with this habit is that it leaves you vulnerable to emergencies. You’ve taken up the majority of your available credit, so you can’t depend on it for unexpected payments. What if you need to pay for an urgent repair and there’s not enough room on your card? What can you do?
To avoid that difficult situation, you could apply for an online loan to help you cover the emergency costs and move forward. See how you can apply for an online loan in Ohio when you have no other safety nets to fall back on. It’s important that you only turn to this solution when you’re dealing with an emergency. It’s not for everyday purchases or small budgeting mistakes.
In the meantime, you should try your best to keep your credit utilization at 30% or lower — this means that your balance should be below the halfway point of your limit.
Habit 2: Paying the minimum
You pay your credit card bills on time, but you only give the minimum payment. While this habit can stop you from racking up late fees and penalties, it can still get you into hot water if you’re not careful.
Only paying the minimum for your bill will make it very difficult for you to whittle down the balance, especially when you’re continuing to charge expenses on your card. You’re only taking $20-$25 off a growing pile.
So, what can you do? If you’re paying this amount by choice, stop it — you’re only making things harder for yourself down the line. If you’re paying this amount because you don’t have any more funds, look at your budget to see whether you can cut your monthly costs to get more savings and use them to tackle your balance.
Habit 3: Using it for every single expense
You don’t need to put every single expense on your credit card. Your morning coffee? Your afternoon snack? Putting these small, everyday expenses on your card is a habit that can make your balance climb quickly.
You also don’t want to put some very important expenses on there, like mortgage payments. For one, these payments are large and will take up a significant amount of your credit. Secondly, if you need to use a credit card to make these payments on time, you need to reinvestigate your budget to see whether you can actually afford your living space.
So, what you should you do? Use a debit card, cash or checks to pay for the items above. Only put expenses on your credit card that you’re positive you can pay off in a reasonable timeframe.
Don’t let these bad habits drag you down and get you into financial trouble. Break them now, before it’s too late.
Free credit reports have been extended; here’s why it’s important to check yours regularly
Typically, you’d be able to check your credit report — at least for free — just once annually through each of the three major credit reporting agencies. But thanks to the coronavirus pandemic, credit reports are now more accessible than ever.
Credit reporting companies Equifax, Experian and TransUnion are all offering free credit reports weekly through April 20, 2022.
The move means better insight into your financial health during what, for most, is an economically challenging time. According to experts, it might also be a time that’s ripe for at-risk personal information and identity theft, too — even more reason consumers should be checking their credit on the regular.
Have you checked your annual credit lately? If not, here’s what you need to know about these free nationwide credit reports and how to get them. If you’re not sure where you fit on the credit score spectrum, you may want to start using a credit monitoring service to track changes to your credit score. Credible can get you set up with a free service today.
Free credit reports for all?
The nation’s three credit bureaus initially started offering free weekly credit reporting last year, just after the pandemic began. In early March, they announced they’d extended the offer for another year, this time through April 20, 2022.
To request your free credit reports and access copies, you can go to AnnualCreditReport.com and provide some basic information to verify your identity (things like your date of birth, Social Security Number, and address).
Once your report is ready, you should see a detailed list of all open and closed accounts in your name, your payment history, recent credit activity and more.
Protect yourself from identity theft
There are many reasons why checking your credit activity is important, but chief among them? That’d be the prevalence of data breaches in today’s world — not to mention the risk of identity theft they come with.
“In the past, it was perfectly acceptable for people to check their credit history once a year, but now with security breaches happening on a regular basis, consumers should be monitoring their credit more closely than ever,” said Clint Lotz, president and founder of TrackStar.ai, a predictive credit technology firm.
Lotz said the Equifax breach — which exposed over 147 million Americans’ personal information in mid-July 2017 — is the perfect example of why watching your credit report is important as far as identity theft protection goes. The pandemic, he said, adds an extra layer of risk to things.
“It took them [Equifax] months before they even realized they had been hacked, and considering that they hold files on hundreds of millions of Americans, it’s fair to say that many identities were stolen by the time they caught up to it,” Lotz said. “With many of us worrying about very serious issues not related to our credit, it’s a prime time for that stolen data to be put to work by bad actors in slow, methodical ways and in the hopes that nobody notices it.”
More reasons to check your credit
Checking your credit health often isn’t just good for detecting fraud alerts and to protect your identity, though. You can also monitor your report for errors — things like inaccurately reported late payments, for example — and then dispute those with the credit bureau.
If the error gets corrected, it could improve your credit score and make a jump from bad credit to a FICO score that’s more favorable. Not sure of your credit score? Head to Credible to check your score without negatively impacting it.
You can also use your credit reports and scores to monitor your financial habits — like the timeliness of your payments or how much debt you have left to pay off. Both of these factors can play a big role in your score, as well as how likely you are to get approved for loans, credit cards and other items.
“If you’re taking out a loan, getting insurance or even applying for a new job, checking your credit will allow you to see an overview of what would be seen by others looking at your credit,” said Leslie Tayne, a debt relief attorney with the Tayne Law Group. “Staying up-to-date on your credit reports and information allows you to know exactly where you need to improve.”
Want to be sure your credit is stellar before applying for a loan or insurance policy? Consider Credible’s partner product Experian Boost, which lets you use positive payment history on utilities, streaming and other bills to improve your credit score.
Set up a monitoring service, too
Though checking your credit reports manually is smart, you should also consider signing up for a credit monitoring service. These consumer financial services check your credit information and score regularly and alert you of any changes.
If you’re interested in monitoring your credit or improving your score, head to Credible and learn more about how Experian can help. You can also use Experian Boost to get credit for on-time bill payments.
Have a finance-related question, but don’t know who to ask? Email The Credible Money Expert at [email protected] and your question might be answered by Credible in our Money Expert column.
Do Personal Loans Have Penalty APRs?
Select’s editorial team works independently to review financial products and write articles we think our readers will find useful. We may receive a commission when you click on links for products from our affiliate partners.
The Blue Cash Preferred® Card from American Express, for instance, has a 13.99% to 23.99% variable APR, but the penalty APR is a variable 29.99% (see rates and fees). Penalty APRs usually last for at least six months, but card issuers often reserve the right to extend them — especially when you continue making late payments. A look at the terms for the Citi® Double Cash Card show us that the “penalty APR may apply indefinitely.”
Penalty APRs are certainly not a trap you want to fall into, but it’s not something you usually have to worry about if you have a personal loan. Personal loan lenders can, however, charge late fees upwards of $39 per late payment. Whether your loan charges late fees all depends on how good of a loan you qualify for, and that comes down to your credit score, borrowing history and ability to make your payments.
Personal loans also tend to charge lower interest rates than credit cards, too. The average personal loan interest rate for two-year loans is currently 9.46% according to Q1 2021 data from the Federal Reserve, compared to 15.91% for credit cards.
Typically, interest rates for personal loans range between roughly 2.49% and 24%, but personal loans for applicants with bad credit can come with even higher APR — so do your research before applying.
Other common personal loan fees include:
- Interest: The monthly charge you pay to borrow money
- Origination fee: A one-time upfront charge that your lender subtracts from your loan to pay for administration and processing costs
- Late fee: A one-time fee charged for each payment that you fail to make by the due date or within your grace period
- Early payoff penalty: A fee incurred when you pay off your balance faster than planned (because the lender misses out on months of expected interest payments)
As you can see, personal loans can be costly, even without a penalty APR. It’s obviously best to avoid paying extra fees whenever possible. That’s easier to do when you have a good to excellent credit score, since you’ll qualify for better loan options.
None of the loans on our best personal loan list charge origination fees or early payoff penalties, but some may charge late fees.
Find the best personal loans
For rates and fees of the Blue Cash Preferred® Card from American Express, click here.
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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