5 Common Credit Myths Busted

Wouldn’t it be great if all Canadians had an excellent understanding of credit scores? Unfortunately, that isn’t the case. With financial literacy lacking in the school system, most of the knowledge we receive about credit scores is secondhand from family and friends. Sometimes that information is right, sometimes it’s not.

Let’s take a look at some of the most common Canadian credit score myths and help dispel them once and for all.

Myth #1: I’ll Hurt My Credit Score by Checking It

This is false in most cases. If you’re checking your own credit score or credit report using a free or paid service, then it won’t affect your credit score. However, if you’re applying for a new credit card and the bank pulls your credit report, that can drag down your credit score.

That’s because there are two main types of credit inquiries, “soft” and “hard” credit inquiries. Soft inquiries like checking your own credit report aren’t noted on your credit history and therefor don’t affect your credit score, while lenders and credit card companies do a hard inquiry, which is tracked on your credit history, to determine how much credit they can offer you.

Too many “hard” inquiries can make it look like you’re shopping around for credit – which can be a red flag for lenders.

This brings us to Myth #2…

Myth #2: All Credit Reports Are The Same

In Canada we have two different credit bureaus: TransUnion and Equifax.

Consumers are typically listed with both, though the information can vary between the two depending on how the companies you do business with report credit and payment histories. You can get your free TransUnion credit report online here and your free Equifax credit report here. Both companies also offer credit monitoring, which can be a good investment if you’re concerned about identity theft or fraud.

Both companies also offer several different views or versions of an individual credit report to businesses. Depending which view a business is using, they may see a different score. This is true for free online credit scores as well, as Marketplace reported in October 2019.

Myth #3: I’ll Improve My Credit Score by Lowering My Credit Limit

Again, this is false in most cases. One important factor that determines your credit score is your credit utilization. That’s a fancy way of saying how much of your available credit you’re using.

A good rule of thumb is to keep your credit utilization below 35%. For example, if you had a credit card with a $10,000, you’d want to keep it below $3,500 (35 percent) at all times. When it gets above 50 percent lenders tend to get nervous that you could be running into financial difficulties.

Giving yourself some breathing room makes sense for most people, but if you’re someone who knows you’ll spend right up to your limit if it’s available, you might be better off with a lower credit limit. Just be aware it’s likely to hold back your credit score – although that’s better than having a large balance on your credit card next month!

Myth #4: I’ll Help My Credit Score by Closing Old Accounts

Do you have a credit card in your wallet that you haven’t used for a while? Your first instinct may be to close it, but did you know that could actually hurt rather than help your credit score? That’s right, if you have a long history of making your payments on time and in full, by closing this credit card, your credit score is likely to take a hit.

You may be wondering why. The reason is simple. The length of credit history is another factor that comes into play with your credit score. When you close an old credit account, you’re shortening the length of your credit history, so it’s best not to do in most cases. The only time it may make sense is if you’re barely using a credit card and it comes with a hefty annual fee. Otherwise, you’re most likely better off keeping it open.

Myth #5: When Does An Old Bill go into “Collections”?

Everyone knows that having an item in collections will have a seriously negative impact on their credit report. But we recently helped a client who had an item in collections – and she didn’t even realize it.

Because the debt was with an internal collections team and hadn’t been transferred to an external agency, she didn’t realize the overdue bill was now considered as “in collections”. But that was what the credit bureau was reporting, and what was holding her back from getting more credit when she needed it.

If you want to learn more about which credit myths might be holding down your credit score, contact one of our credit consultants for a free consultation. They can review your credit report with you and help you find the right tools to grow your score.

About the Author

Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Finance Journalist, Money Coach and Speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail, Financial Post and MoneySense. Connect with Sean on LinkedInTwitterFacebook and Instagram.

Ways to Boost Your Credit Score

Your credit score is like a grown-up version of a report card. It shows how liable you are to pay off debt on time and in full and how likely you are to default.

But everyone makes mistakes and it’s common for your credit score to drop while you’re still learning about how to be responsible with your money. Like a low GPA, you can raise your credit score fairly easily.

Read below to find out how to boost your credit score and how to keep it high.

Pay Your Bills on Time

The biggest element in your credit score is if you pay your bills on time every month. That makes up a huge portion of your credit score. When you make a late payment, the company notifies the credit bureaus that produce your credit scores.

Figure out why you struggle with late payments. Is it because you often don’t have enough money to pay your bills? Or do you simply forget to pay your credit card bill?

Set up automatic payments from your bank account for all your bills. You can pay just the minimum if you can’t afford to pay the entire statement at once.

You can also create recurring calendar reminders in your phone, calendar or planner. If you prefer getting physical reminders of your bills, sign up for paper statements to be sent to your home.

As soon as you notice a late payment, call the company and make a payment right then. Usually, a payment needs to be more than 30 days late for it to show up on your credit report.

Lower Your Credit Use

A credit score tells prospective and current lenders how responsible you are. One of the factors that determine your creditworthiness is how much credit you’re currently using or your credit utilization. This makes up 30% of your credit score, so it’s an important component. This mostly affects credit cards and lines of credit.

You can find your credit utilization ratio or percentage by dividing your current credit balance by the available credit limit. Look up your credit card bill and view the most recent balance and then find the total credit limit.

If your balance was $3,000 and your credit limit is $10,000, then your utilization percentage is 30%. That means you should pay off more of your balance or call the credit card provider to increase the limit.

Fix Mistakes

It’s not uncommon for your score to be low because of a mistake or error on your credit report. That might be because your identity was stolen, and someone opened a credit card in your name. It might also be because you didn’t get a bill in the mail and the lender sent the bill to collections.

Look at your credit report to see if there are any mistakes and call the lender to ask about any collections or defaults. If you find an error, try to fix it as quickly as possible.

Avoid Opening New Accounts

Too many new accounts will affect the average age of your credit accounts. If possible, don’t open any new accounts unless you absolutely need it. If you have a lot of new accounts, a lender might think you don’t have enough cash on hand.

If you’re still having trouble increasing your score, check out Climb’s Personalized Credit Prescription that will give you custom, specific advice on how to increase your credit score.

About the Author

Zina Kumok is a trained journalist and has covered everything from professional sports to murder trials. Now, she specializes in personal finance and has written for brands and publications such as Mint, Investopedia and Discover. She paid off $28,000 worth of student loans in three years.

How to Read and Understand Your Credit Report

In my last article, I looked at how do you update or dispute information on your credit report. However, it’s tough to spot an error on your credit report, especially if you don’t know how to read it in the first place. Being able to read and understand your credit report is a vital skill to have. If you don’t know how to read it, you won’t be able to spot any potential mistakes. This can hinder your ability to obtain credit with the most favourable terms and conditions.

Let’s take a look at how to read and understand your credit report.

Reading Your Credit Report

There are two major credit reporting agencies: Equifax and TransUnion. Each has its own credit report. You can request one for free from each every 12 months. It’s a good idea to do that because one may be different than the other. For example, some lenders only report to one credit reporting agency. Likewise, one credit report may have an error, while the other doesn’t. Although the credit report format is slightly different, they both convey similar information.

At the top of your credit report, you’ll find personal information to identify yourself, such as your name, any aliases you go by, date of birth and social insurance number. Below that, you’ll find your address history and employment history. You’ll want to review to make sure it’s accurate.

A section you’ll want to pay extra attention to is any recent credit inquiries. If there are any creditors you don’t recognize, you’ll want to inquire with them. This could be a sign of identity theft – when someone steals your identity and tries to fraudulently apply for credit in your name.

Understanding Debt Ratings

There are so many different types of credit – car loan, credit card, line of credit, student loan and mortgage, to name a few. To make it easier to keep track, Equifax and Transunion have assigned the credit types with debt ratings. The codes are made up of two parts: a letter and a number.

The letter stands for the type of credit it represents.

I is for “installment loans” like car loans. An installment loan is any money borrowed as a lump sum for a specific timeframe to be repaid in fixed amounts or installments on a regular basis until the loan is repaid.

M is for “mortgage loans” like the mortgage on the home your family lives in. A mortgage is a lot like an installment loan. You typically spread the repayment over 25 years, making regular payments on a monthly basis.

O is for “open status credit” like lines of credit. You can borrow money as you need it up to your credit limit. You only need to pay interest on the amount that you borrow. Often you make interest-only payments to keep your account in good standing.

R is for “revolving or recurring credit” like your credit cards. This is the most common type of credit. Revolving credit is a lot like open status credit. You’re required to make a minimum payment based on the amount you borrow. Your minimum payment is usually a flat dollar amount or a percent of your outstanding balance.

Your debt rating also comes with a number. It can be between 1 (the best rating) and 9 (the worst rating to have). If you have a 1 rating on all your credit types, it will go a long way to boosting your credit score. If your credit score is higher than 1 too many credit items, it could negatively impact your credit score.

0 – Too recent/new for a rating; or approved, but not yet used

1 – Paid within 30 days of billing; pays as agreed.

2 – Payment 31-59 days late.

3 – Payment 60-89 days late.

4 – Payment 90-119 days late.

5 – Payment more than 120 days late, but not yet rated “9.”

6 – N/A

7 – You make regular payments under a special arrangement, such as a consolidating loan, with a credit counselling agency.

8 – The property has been repossessed

9 – The debt has been written off as “bad debt” and/or it has been sent to a collection agency; or you’ve filed for personal bankruptcy.

Let’s put them together. If you had a debt rating of R1, it means you have a credit card where you always make at least the minimum payment on time. However, if you have a M3 rating, it means that you have a mortgage where you’ve made a payment at least 60 to 89 days late.

There you have it. How to read and understand your credit report in a nutshell!

Need some help understanding your credit report? Contact our offices today. We’re happy to walk you through it.

Climb’s Personalized Credit Prescription provides you with customized recommendations to help rebuild your credit score.

About the Author

Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Finance Journalist, Money Coach and Speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail, Financial Post and MoneySense. Connect with Sean on LinkedInTwitterFacebook and Instagram.

How Do I Update or Dispute Information on My Credit Report

Your credit report, in a nutshell, is a history of how you’re using and have used credit. It provides a snapshot of your financial history. It’s one of the main ways lenders, such as banks and credit cards, assess you before approving your credit application. Your credit report includes important information, such as your name, address history, social insurance number (SIN), telephone number, date of birth, employment history, credit history, public records (bankruptcies or judgments) and any credit inquiries.

So, you check your credit report and see an error or something that’s out of date. How do you update and dispute this information? Read on to find out.

How Do Errors Occur On Your Credit Report?

Although errors don’t happen very often, you’ll want to take steps to correct them when they do occur. Before we discuss correcting errors on your credit report, it helps to talk about how errors happen.

Here are some common reasons why errors or inaccuracies may occur:

  • You made credit applications under different names (i.e. Rick Cooper, Rich Cooper, Richard Cooper, etc.).
  • Your lender made a data entry error when typing in your personal information, such as your name or address.
  • You provided an incorrect SIN or your lender mistyped your SIN.
  • Credit payments were applied to the incorrect credit account.
How Do You Spot Errors on Your Credit Reports?

The easiest way to spot an error on your credit report is to regularly review it.

There are two major credit reporting agencies: Equifax and TransUnion. You can request your credit report for free once every 12 months from each. It’s advisable that you order a copy of each, as each credit reporting agencies might have slightly different information for you.

Here’s how to order your credit report by mail:
  • Make your request in writing using the forms provided by Equifax and TransUnion
  • You must provide copies of two pieces of ID, such as a driver’s licence or passport
  • You’ll receive your credit report by mail

Here’s how to order your credit report by telephone:

  • Call the credit bureau and follow the instructions
    • Equifax Canada

Tel: 1-800-465-7166

  • TransUnion Canada

Tel: 1-800-663-9980

  • Confirm your identity by answering a series of personal and financial questions
  • You may also need to provide your SIN and your credit card number to confirm your identity
  • You’ll receive your credit report by mail
Fixing an Error on Your Credit Report

You’ve spotted an error or an outdated piece of information and you want to update it. Here’s how.

  1. Gather documentations relating to your credit dispute. You may be asked to provide it to support your claim.
  2. Contact the credit reporting agency with the error or outdated information and request for it to be corrected and updated. Both Equifax and TransUnion have their own forms for correcting errors.
  3. You may be able to speed up the process by contacting the lender directly to have the error or information corrected.

There you have it. All the steps you need to update and dispute information your credit report. By getting into the habit of regularly reviewing your credit report, you can spot errors and get them corrected right away.

About the Author

Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Finance Journalist, Money Coach and Speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail, Financial Post and MoneySense. Connect with Sean on LinkedInTwitterFacebook and Instagram.

Credit Score: The Truth Behind It and Why It’s Important

Are you planning to borrow money for a major purchase such as a home or car in the not too distant future? Before lenders extend you credit, they want to make sure you’re going to pay it back in full and on time. How do they do that? They do it by reviewing your credit score.

Your credit score is one of the key factors lenders consider before approving your credit application. By maintaining a good credit score, you’re more likely to get favourable loan terms, which can help you save money.

In this article I’ll put a positive spin on credit scores and share some of the truths behind it and why it’s so important.

What is a Credit Score?

A credit score is a three-digit number assigned to you by the credit bureaus, Equifax and TransUnion. Just like your grades in school, the higher your credit score, the better it is. Your credit score is a number that falls between 300 (lowest) and 900 (best). You don’t have to have a perfect credit score. A score of at least 680 is considered good by most lenders and can help you get the lowest interest rate.

Now that you have a better understanding about credit scores, let’s take a look at the five key factors that impact your credit score.

Your Payment History

Lenders are looking for borrowers who have a steady payment history. In fact, your payment history is the most important factor to lenders. To be seen in a positive light by lenders, try to pay your bills on time and in full. Sometimes life happens and you can’t afford to pay the full amount. If that happens, at least make the minimum payment so that your credit account remains in good standing.

Your Available Credit

The second most important factor after your payment history is your available credit. Your available credit is how much money you can borrow at any given time. You can figure out your available credit by taking your credit limit minus any balances that you’re carrying on your credit credits. Aim to use less than 35 percent of your available credit. If you use any more than that, it can negatively impact your credit score.

The Number of Credit Inquiries

Credit inquiries are when lenders make a request to obtain information on your credit. There are two kinds: soft hits and hard hits. Soft hits, such as requesting your own credit report, don’t count towards your credit score, while hard hits, such as applying for a credit card or mortgage, do. Try to limit the number of credit facilities you apply for, otherwise it could lower your credit score.

Your Credit History Length

Lenders also want to see that you have a long track record of using credit in a responsible manner. They care about how long you’ve had credit accounts open. So, if you’re thinking about cutting up a credit card you haven’t used for a while, you might think twice, since it could actually lower your credit score. (Just be sure to use it every once in a while to avoid those pesky inactivity charges.)

Credit Types

Lenders prefer a mix of credit. If you just have one type of credit, it can actually lower your score. Instead of just having credit cards, try to spice it up with credit cards, lines of credit and personal loans. But don’t go crazy. Only apply for credit that you truly need.

About the Author

Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Finance Journalist, Money Coach and Speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail, Financial Post and MoneySense. Connect with Sean on LinkedInTwitterFacebook and Instagram.

Poll Finds Almost Half of Canadians are $200 Away from Insolvency

January 21st was Blue Monday. In case you’re not familiar with the term, Blue Monday is a name given to the supposed most depressing day of the year. If the sun setting before 5pm and the cold weather outside doesn’t dampen your spirits, getting your holiday credit card statement in the mail might just do it.

To coincide with Blue Monday, insolvency firm MNP released its latest poll with some eye-opening findings.

A Third of Canadians Don’t Make Enough to Cover Bills and Debt Repayment

MNP’s poll found that 46 percent of Canadians are $200 or less away from financial insolvency. That’s up from 40 percent the last quarter. Furthermore, 31 percent of respondents feel that they don’t earn enough to pay the bills and meet debt obligations. That’s up seven percent from last quarter.

With the Bank of Canada raising interest rates five times since mid-2017, Canadians are feeling the pinch. No more so than those living on the financial edge. The poll found that 51 percent of Canadians are feeling financially pinched by higher interest rates. That’s up from 45 percent the previous quarter.

These are some quite startling findings. It shows that Canadians aren’t saving enough for a rainy day. Any unanticipated increase in the cost of living or interest rates could push them over the financial edge.

Canadians Going into Debt to Pay the Bills

Canadians are a resilient bunch. Instead of filing for bankruptcy or a consumer proposal, they’ll use every tool at their proposal to pay for day to day living expenses. One of those tools is going into debt. The poll found that 45 percent of Canadians said they would need to go into debt to pay living and family expenses.

Higher living expenses aren’t the only concerns of Canadians. Further interest rate increases are a worry, too. Half of Canadians say that they would find themselves in financial trouble if interest rates keep rising. That’s up five percent from last quarter.

Higher living costs coupled with higher interest rates could put some Canadians in a real financial bind. The cost of living will most certainly keep rising. The only question is when will interest rates rise. If it ends up being sooner rather than later, it could impose a lot of financial pain on some Canadians.

Protecting Yourself from Higher Interest Rates

If you  have consumer debt, it’s important to come up with a plan of attack. As I mentioned in an earlier article, the debt avalanche and debt snowball methods can both be effective for paying down your debt. Likewise, you might want to look into getting a consolidated loan at a lower overall interest rate. Once you have your debts under control, your next focus should be building an emergency fund. Financial experts recommend saving three to six months’ living expenses in a savings account. Coming up with that much money at once can be tough, so start saving $200 per month or whatever you can afford and you’ll have a full funded emergency fund before you know it.

About the Author

Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Finance Journalist, Money Coach and Speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail, Financial Post and MoneySense. Connect with Sean on LinkedInTwitterFacebook and Instagram.

Is Perfect Credit Necessary?

Guest written by our friends at LoansCanada.

Is Perfect Credit Necessary?

Getting by without credit is rare for most people these days, especially in Canada, where credit cards and loans are two of the main ways that people deal with unexpected costs and sometimes even day to day expenses. So, when it comes to the health of your credit, is good credit enough? Or should we all be striving for perfect credit?

Check out these five healthy credit boosting tips.

What Are Your Credit Score and Credit Report?

In the world of credit, your credit score and credit report are important when you’re trying to get approved for most credit products, such as installment loans, lines of credit, and mortgages. That’s because both elements showcase your ability as a credit user.

When your first credit product gets activated, your creditor will send your information to either one or both of Canada’s major credit bureaus; Equifax and TransUnion. Typically, both bureaus will have a slightly different version of your credit score and credit report on file. When you apply for a new credit product, your lender may ask to pull your credit as a way of calculating your creditworthiness.

Your Credit Score

A three-digit number ranging from 300-900, your credit score is one of the first things that any potential lender will look at when considering you for new credit. Like a grade-point-average, your score is a basic way of depicting your credit health. Every good credit action you make will elevate your credit score, leading to all sorts of possibilities and benefits down the line. The further your score climbs toward 900, the better your approval results will be.

Your Credit Report

In many ways, your credit report is even more important than your credit score. That’s because your report is a detailed file that contains a history of all your credit usage spanning over a predetermined number of years. Essentially, if your score is like your grade-point-average, then your credit report is like your report card.

Although your credit score gives a lender a simplified look at your creditworthiness, your report is used to get a detailed picture of the way you have handled credit in the past and the way you might handle it in the future. Your report also details your status of residency, social insurance number, and other kinds of personal information. For the best approval results and interest rates, it’s best to have a clean and healthy-looking credit report.

Why Good Credit is Important

Generally speaking, good credit qualifies as having a credit score that falls somewhere between 700 and 900, although it’s important to keep in mind that what passes as good credit will vary from lender to lender. A good credit score implies that you have been and will continue to be responsible with all your active credit accounts. Good credit is also important because:

  • Less risk is imposed on the lender, so you’ll be more likely to qualify for a lower interest rate. The lower your interest rate is, the more money you’ll effectively be saving over time.
  • Good credit means you are responsible and gives you the best chance at being approved for any credit product.

Is Perfect Credit Necessary?

Having perfect credit, often represented as having a credit score above 800, is a surefire way of getting approved for any credit product on the market and saving money on interest. However, whether perfect credit is necessary really depends on what kind of credit product you’re applying for, how much credit you’re requesting, and the type of lender you’re applying with.

For example, if you plan to apply for a mortgage through your bank, your credit health would need to be next to perfect, because banks have high approval standards and a mortgage involves a significant amount of money. The more of a risk you pose as a client, the less likely they’ll be to approve you. On the other hand, applying for a small loan or traditional credit card poses far less risk, so perfect credit isn’t necessary.

All this said, there are plenty of other organizations that you can apply with if your credit is less-than-perfect, such as alternative, privately funded, and bad credit lending institutions. Just know that while your approval would be more likely with such places, your interest rate may be less affordable. This is one of the main reasons why all Canadian consumers should keep an eye on their credit and implement healthy financial habits so that they can build and nurture a good credit score.

Is Perfect Credit Worth Being in Debt?

The simple fact is, the more credit you use and the more loans you take on, the more opportunities you create to build and improve your credit. For those consumers who are looking to grow their credit, it is all too easy to become fixated on the idea of perfect credit. It’s important to keep in mind, while good or even great credit can help you achieve financial goals and creates opportunities, racking up excessive debt just to see a three-digit number rise, is not worth it.

Learn how to improve your credit score without increasing your debt, click here.

When All is Said and Done…

Perfect credit, while it may seem beneficial, is not necessary. In fact, it can be quite difficult to obtain “perfect” credit in the first place. So, if your credit score isn’t in the high 800’s, there’s no need to worry. Instead, aim to have healthy financial habits that lead to good credit.