Small credit mistakes, like paying off your credit card a few days late, aren’t a big deal.
You pay a small penalty or a bit of interest and carry on as before. A slip up like that won’t come back to haunt you the next time you apply for a mortgage.
Other mistakes though can have a significant impact, even if they seem relatively minor at the time. They can stay on your credit record for years and potentially cause you to not qualify for a mortgage or loan or have to pay a higher interest rate.
Here’s a list of five credit mistakes that you definitely want to avoid:
Ignoring your financial details.
Not being aware of what interest rates you are paying or when a temporary or “teaser” rate ends can be very costly. Carrying debt on certain accounts harms your credit score far more (credit cards) than others (lines of credit).
You need to have a clear picture of all debts that you owe, how much they are costing you and review regularly to make improvements if necessary.
Draining retirement funds to avoid bankruptcy.
While nobody wants to claim bankruptcy, sometimes it’s the right choice. RRSPs are generally exempt from bankruptcy proceedings (except for amounts deposited in the last 12 months in some provinces) and can be left there to help you rebuild on the other side of the bankruptcy proceedings.
Not checking your credit.
You can check your credit report easily and for free in Canada through Equifax and TransUnion. Checking regularly (at least once per year if not twice) will allow you to become aware of any credit issues or fraud sooner so that they can be dealt with.
Having something unexpected appear on a credit report is common for Canadians and it’s up to you to watch for them.
Co-Signing a loan.
While this might make sense on a rare occasion, it should be avoided most of the time and only be considered with extreme caution.
I realize that it can be hard for young people to buy their first home these days but if they can’t qualify on their own, they likely shouldn’t be going ahead. Not only will your co-signing reduce your own borrowing capacity, if the loan isn’t repaid it can be disastrous to your own finances.
Not carrying any credit at all.
With all the pitfalls of having access to credit, it is still a necessary evil for most people. If you elect to go without a credit card or any other credit vehicle, you won’t build up a credit score which means you won’t be able to qualify for a loan when you need one.
And don’t cancel your first credit card either. Longevity in your credit history is equally important!
Having bad credit isn’t permanent and your score can be improved over time. But like many things in life, doing so takes a little bit of time and effort. But it’s not that hard.
Just put a semi-annual reminder in your calendar to sit down and review your credit and request a report.