Are Your Credit Ratings Healthy ?

Hudson-smallBy Paul Hudson
Published: Nov. 25, 2013

 

Your credit rating reflects your financial health, and health, as they say, is wealth.

And it pays to be healthy because the cold truth is that the organizations that lend money have the legal right to discriminate on who gets access to their money.

For this reason, it’s prudent for all of us to maintain a strong credit rating if we have plans to borrow money. But what is it that makes a credit rating strong?

And more importantly, how do we ensure our credit ratings aren’t at risk of being weakened?

When I first became a lender in 1998, I was taught the Five Cs of credit (character, collateral, capacity, capital and conditions).

These are excellent guidelines for a lender to assess how risky your borrowing proposition is.

However, in the post-2008 world, scoring well in all five of these categories will not get a borrower far if his or her credit rating is weak.

In fact, qualifying for a competitive mortgage rate can be a tougher proposition any time a credit rating is below a score of 680.

On occasion, I have had to break news to clients about why they were unable to borrow at the rate and terms they had requested.

This is frustrating news to give to clients who have always made their payments on time and worked hard to establish a credit rating over many years.

Credit ratings used by Transunion and Equifax (the two credit bureaus in Canada) are measured on a scale between 300-900.

Most of us know one way to keep credit rating healthy is to ensure payments are always made within 30 days of their due dates. However, other factors come into play affecting credit scores.

Equally important is ensuring balances on revolving credit (credit cards & lines of credit) are not maintained for long periods of time (beyond 90 days).

A good rule of thumb is to keep long-term balances on revolving credit below 50 per cent of the limit, to maintain a high rating. 

High debt levels kept for longer periods of time can send the message a borrower is not in a position to manage debt, regardless of payments being made on time in the past.

Other factors including multiple credit inquiries, inactive credit accounts and the length of time an account has been opened can also have a negative effect on a credit rating.

An incorrect or inaccurate reporting to a credit bureau is not an uncommon occurrence either.  To avoid unwanted surprises the next time you apply for credit, contact Transunion or Equifax annually for a free copy of your credit report.