The credit reporting system is one of the biggest mysteries for consumers when it comes to personal finance topics. In fact, we regularly get a lot questions about how personal credit ratings work. The credit rating system is complex, but it can be easily understood by every day Canadians who want to find out where they stand. If you want to learn more about what credit ratings and credit scores are and how they work, you can learn about these here.
If you’ve heard some things about credit that concern or trouble you or perhaps you’re wondering about your own credit situation, to help separate fact from fiction, here are five of the most common credit myths — debunked and explained:
Myth #1: Your score goes down every time someone checks your credit
Generally speaking, if you have applied for credit a number of times over the past year or so it will lower your credit score. However, there are many credit checks that don’t lower your score. Most notably is your own. When you request your own credit report and credit score, there is no negative impact on your credit rating. Another time your credit rating isn’t impacted is when a creditor you already do business with pulls what’s called a “soft” inquiry. If you have any type of credit with a creditor, your agreement with them usually gives them permission to check your credit from time to time. They do this to manage their risk but also for marketing purposes, e.g. to offer you a limit increase on your credit card.
Your credit score also is not impacted if you are shopping for either a car loan or a mortgage within a short period of time. When someone wants to buy a car or a home, the credit scoring system recognizes that they might have to allow a few credit checks all within about two weeks. While each lender’s inquiry will be reflected on someone’s credit report, all inquiries within the specified time frame will count as if they were only one inquiry.
Myth #2: Late payments aren’t a big deal; they got their money eventually
Consistently making late payments reflect extremely negatively on someone’s credit, regardless if the full payments were made eventually. When you agree to a lender’s terms and conditions, it is your responsibility to live up to your end of the deal. A good litmus test is thinking about how you’d feel if the tables were turned.
Imagine lending your friend money and they agreed to make payments to you to repay the debt on the first of each month. Would you be very willing to lend them money again in the future if they only paid you whenever they got around to it?
Myth #3: Someone with lots of credit cards must have good credit
A lot of credit cards is no guarantee of a good credit rating. Someone might only be making minimum payments on all of them, or worse, juggling one to pay the other. Or they may have applied at a time when their circumstances were very different and they were forced to hang onto the cards because they couldn’t afford to pay them off. Seeing someone with a lot of credit cards is just that; a lot of cards — and potentially, a lot of debt.
It’s this potential debt that could make it harder for someone to borrow money in the future. Even when you don’t owe much or anything on your credit cards, you have them available to you and you could use them at any time. This would make a lender leery of giving you a loan or mortgage because the question is would you be able to make the loan or mortgage payments if you owed the full amount on all of your credit cards? If the answer is no, then paying off and closing credit cards you don’t need and can’t afford is the way to go.
Myth #4: Making minimum payments protects your credit rating
Making minimum contractual payments as agreed on credit cards, loans and lines of credit means that someone protects their credit rating when they first start out with the various debts. However, carrying on with only making minimum payments year after year signals a potential cash flow problem to lenders. Lenders like to see debts being paid off, e.g. money was borrowed for a specific purpose and now the borrower is taking steps to repay the debt.
If you find yourself struggling to escape the cycle of only making your minimums, it’s best to establish a realistic plan to deal with your debts and get back on track sooner than later. The longer you wait, the less options you may have available to you. If you need help creating a plan or considering which options and solutions are best for your situation, get some help from a local non-profit credit counselling organization. Their Credit Counsellors are usually trained budgeting and debt experts who can help you put together a realistic plan to get out of debt as quickly as possible. They can also let you know about any debt relief or repayment programs that might be available to you.
Myth #5: I screwed up my credit big time — no one will ever lend me money again
The good news is that screwing up big time a long time ago, might mean that your credit history report has recovered from your past. In Canada, most reportable information is removed from your credit report after six to seven years. This means that your credit report might have nothing, or very little, on it. Judgements registered against you, government debt, and potentially a bankruptcy are notable exceptions; they could stay on longer.
In this day and age, however, it’s highly unusual to see a mature adult with little information on their credit report. Seeing a virtually blank credit report would cause a lender to ask questions, but depending on your overall situation, they might be cautiously optimistic about lending you a reasonable amount. And if your credit report really is blank, start slowly and carefully rebuilding your credit rating. There’s no quick fix for credit repair; slow and steady wins every time.
How to Check Your Credit
If you’re wondering where your credit is at, you can obtain a free copy of your credit report from each of Canada’s credit reporting agencies, TransUnion and Equifax. Sometimes each of these credit bureaus has slightly different credit information on you. So it’s good to check both. To find out your credit score, you can use this free credit score estimating tool, pay TransUnion or Equifax for it, or get it for free from a service like Credit Karma. One thing to keep in mind though, is that the credit score all these guys will give you is only an estimate of your credit score. It’s not the real thing – even if you pay for it. It’s also good to bear in mind that these estimates are significantly off more than 20% of the time. The only way to get your real credit score is to have your bank or credit union pull it for you.
The Bottom Line with Credit Scores & How to Get Help
While there are a lot of myths about credit, what you need to know is that your credit basically boils down to one number, your credit score, that is supposed to statistically represent your likelihood of repaying your debts as agreed. If you consistently do the right things with your finances that make sense, your credit should generally improve over time. If you’ve had financial or credit problems in the past, know that everyone eventually gets a fresh start on their credit report and there are things you can do to repair your credit. If you’d like some specific advice, take your credit report to a local Credit Counsellor, ask them your questions, and find out what you can do to improve your situation. You might be surprised to learn that it’s easier than you think. It might just take some time.
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