Recently I was interviewed by Josephine Lim for an article she is preparing for a personal finance blog. The theme is debunking some of the myths which have evolved surrounding your credit history. Here are some of the myths I offered her to help with the article:
Myth (1) Your credit score stays the same for a month at a time.
No, it can change daily and during the course of a day for that matter. It is a living breathing thing. People think this because when they access an online report they are told they can view it whenever they want for the next thirty days.
Myth (2) I cannot get a mortgage till at least six years after I complete a bankruptcy or consumer proposal.
Not true – every case is unique, and many people have a mortgage within a couple of years of completion (some much sooner) In fact, last month we arranged a five year mortgage for a client at 3.85% who completed a consumer proposal one year ago.
And another couple completed their bankruptcies five years ago, and that fact and the negative payment history attached to those debts is still on their credit reports. Nevertheless we are about to close a new five year closed mortgage at 3.39%.
Myth (3) I always pay my credit balance in full, so I have an extremely high score.
No, because if your statement balance(s) are high relative to their limits, the high utilization percentage will drag down your score. Day to day that’s not a big deal, but if you are “prepping” your credit history say for a mortgage, you would be wise to pay the balance off a few times a month, or once – a few days prior to the next statement date.
Myth (4) Credit repair firms can eliminate negative, derogatory information from your credit history.
No that is not true. Unless the negative info is there in error, it must stay there for six years from the date of the last activity.
Myth (5) Checking my credit score frequently will lower my score.
Not true, as long as you don’t ask a third party like a bank officer or mortgage agent to check. Personal inquires by you are considered ‘soft inquiries’ and you can do this as often as you like. Some people even check every few days when they are waiting for an important update.
‘Hard inquiries’ will often lower your score – there is no hard and fast rule – depends on your overall profile. I have seen a personal inquiry make no difference, and another time a score dropped over 90 points!!!
Please note there may well be a hard inquiry on your credit history even if you did not apply for credit. Examples include:
Related Article: Her credit score dropped 99 points after one inquiry
Related Article: Accessing your personal credit report
Myth (6) If I enter into a debt management or debt settlement plan, this will not adversely affect my credit history – and is a big plus versus consumer proposals.
Not true – in fact a debt settlement plan will look worse for the first year or so as most if not all of your payments are going towards your settlement firm’s fees and NOT to your creditors.
Myth (7) Bankruptcy is a terrible thing to do, it creates a stigma and will stop you from every leading a normal life again. It’’ll destroy your credit history forever.
Not true – it’s a wonderful way to get a second chance and to do things right the second time around. And and Ontario, it falls off your credit report six years after your discharge.
Myth (8) I can keep an unused credit card if I enter into a personal bankruptcy. This will help rebuild my credit
No, all credit used or not, must be forfeited when you declare bankruptcy.
It can be different if you are entering a consumer proposal. In my experience, if you have an unused credit card, and you do not owe the card issuer for any other loan product, you can make the argument that card issuer is not a creditor, and thus you need not relinquish that card at the time you enter a consumer proposal.
Not everyone agrees with this though. One trustee wrote to me “All credit card accounts are part of a proposal and as such cannot be kept and used. The only exceptions are third party cards (for example, an employer issued credit card) that the third party gives permission to keep, and also prepaid credit cards.”
Myth (9) My credit history will not be affected by my spouse’s bankruptcy or consumer proposal.
Technically that is true, but if you have joint debt, then it is quite possible derogatory information will seep into your spouse’s credit history. Best to deal with such things in advance; try to pay off joint debt before you take such a step.
Myth (10) I have to wait till I complete my consumer proposal before I can apply for a new credit card.
Not true, in fact if you can afford it, you should apply for a secured credit card within a few weeks of your proposal being accepted by your creditors.
Related Article: How do I repair my credit history
Thanks to Mark Morgan, a trustee with David Sklar & Associates, Ira Smith, founder of Ira Smith Trustee and Receiver Inc., and Karen Adler, a trustee with Rumanek and Company – all of whom helped me with this article.
Fixed or variable rate mortgage? I have no idea. Anyone who says history is a guaranteed window into the future is smoking funny cigarettes