Financial Literacy 101: Cracking the Credit Code

The ability to “buy now, pay later” is something most Nova Scotians take for granted, but many don’t stop to think about their personal credit rating – or the have already checked themselves.

Senior Mortgage Advisor Clinton Wilkins with Clinton Wilkins Mortgage Team says a person’s credit includes everything from credit cards and lines of credit to auto loans, cell phone accounts, utility accounts, mortgages and collectibles.

That’s something he thinks about a lot, since credit is one of the three main checkpoints involved in getting a mortgage – along with Income and assets. But even if you already own a home, maintaining good credit is essential.

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 also depends on your account mix – installment accounts versus revolving accounts – and whether you are borrowing from alternative lenders (money lending institutions, for example) or more traditional lenders, like banks and credit unions. credit.

WHY IS MY CREDIT IMPORTANT?

Bad credit can keep you from getting a mortgage, getting approved for a credit card, or signing up for a new cell phone plan, but it can also affect things beyond borrowing. like renting an apartment or getting a job.

Clinton says sometimes people don’t bother to check their credit because they think it’s none of their business – after all, they’re not asking for a loan or a mortgage – or they just don’t want to look at it. case the news is not good.

“It might sound intimidating because no one really wants to talk about credit, but there are so many misconceptions about it,” Clinton said. “Some people assume their credit is good and it’s not, and sometimes people assume it’s bad but it’s not. This is why it is so important to be sure.

HOW CAN I CHECK MY CREDIT (FREE)

If you’re unfamiliar with your own credit score, Clinton says Financial Literacy Month is the perfect time to check it out, which is free and easy to do.

There are two credit bureaus in Canada: Equifax and TransUnion. Each agency offers paid services – like credit monitoring – and deals with consumer relations to correct 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 its customers: To borrow (available in the App Store and google play) derives the results from Equifax, and Credit Karma (available in the App Store and google play) pulls the results from TransUnion.

These two free apps will even send you notifications about credit applications and give you tips on how you can improve your credit. Logging in to either application will not impact your credit score as it is considered “indirect request”.

HOW IS MY CREDIT? (out of 900 points)

  • GREAT: Score greater than 720
  • GOOD / FAIR: Scores between 600 and 720
  • PROBLEM: Score less than 600

HARD CREDIT INVESTIGATIONS VS. SOFT CREDIT APPLICATIONS

You can check your bank balance as often as you like, but credit checking is different – some checks can potentially hurt your credit, although it’s good to start with.

A “soft” check is when you check your own credit, such as with the To borrow Where Credit Karma application. You can check your own credit as often as you like, and it won’t affect your score.

A “hard” check is when you apply for new credit, and this type of check shows up in your credit bureau.

“These inquiries make it look like you’re looking for credit and not getting approved for it, which negatively affects your credit score,” Clinton explains. “Don’t do these checks unless you plan to accept credit if you are approved. “

While 10% of your credit score is affected by inquiries, the remaining 90% of your credit score is determined by how you use your credit, such as whether you make payments on time and maintain your balances. low.

HOW CAN I IMPROVE MY CREDIT?

So what if your credit score isn’t too high, somewhere below 600 points? How can you improve it?

Clinton says all waivers stay on your credit bureau for six years. You can wait six years for problems to “go away” or you can fix them by talking to the creditor, paying off the debt, or putting in place a repayment plan.

“If you’ve had credit problems in the past, that doesn’t mean you’ll have bad credit forever,” says Clinton.

If you’re in financial trouble and your credit is overwhelming, Clinton says it’s best to speak to a financial professional to see if bankruptcy or a consumer proposal is a good idea.

HOW TO BUILD (OR REBUILD) MY CREDIT?

Whether you’re starting out as a brand new adult or starting from scratch as a more experienced adult, there are specific steps you can take to build good credit.

Clinton says the rule of thumb for good credit is 2-2-2.

  • Two years of history
  • Two accounts
  • Limit of at least $ 2,000 in both

It is better for one account to be a revolving account (like a credit card or line of credit) where you keep the balance below 30%, while the other account is an installment loan (like a car loan) and that you always make payments on time. .

WHAT DOES MY CREDIT NEED TO OBTAIN A MORTGAGE?

Since last July, the Canada Mortgage and Housing Corporation (CMHC) tightened their debt service obligation and began to insist on a minimum credit score of 680. The average Canadian has a 650 credit score, but that doesn’t mean they can’t secure a mortgage. For normal primary lenders, the minimum credit score is 600. If your credit score drops below 600, you may be able to get a mortgage from another lender at a higher cost.

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.

“Missed payments on some credit accounts might not be the end of the world, but if you’re looking for mortgage financing and you already have a mortgage, they don’t want to see missed payments,” says Clinton. “Show them you never miss a payment and they’re all on time. “

DOES MY CREDIT COUNT A LOT ONCE I ALREADY HAVE A MORTGAGE?

If you’ve got a mortgage and don’t plan on applying for credit cards or lines of credit anytime soon, does your credit score really matter?

Absoutely.

“Sometimes mortgage lenders check your credit at the time of renewal, which can affect your renewal offer,” says Clinton. “We have seen clients being offered higher rates on renewal because they were having credit issues, so you should always seek the advice of an impartial mortgage advisor to make sure you are in the best position. possible financial situation in displacement -based term.

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 episode which focuses on dealing with financial traps before the holidays.

Already have a mortgage? It might be a good time to get a lower interest rate.

Not yet an owner? The market is hot and now is the perfect time to buy your first home. Visit TeamClinton.ca to apply for mortgage pre-approval.

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