Published: February 7, 2020 • Last updated: April 10, 2021 at 8:52 am
Nine Strategies To Manage Credit Hygiene and Stay Financially Healthy
Canadians have access to numerous services offering free credit scores, but the problem is they all provide different results. No standard has been established on the credit score front. I do not see this issue being resolved anytime soon and, in fact, predict that we will see even more credit score inconsistencies throughout 2020.
Not long ago CBC Marketplace wrote about this very topic. Should You Trust Your Credit Score
So, to help guide my clients in the right direction when it comes to their creditworthiness, I’ve coined a term to describe your overall credit health that I call “credit hygiene”. I encourage Canadians to focus more on their overall “credit hygiene” rather than on a specific score.
Sunday, May 10, 2020 Update
Free Credit History Reports Through the COVID-19 crisis
Both Canadian credit reporting agencies are giving free instant online access to your credit report. This is a great opportunity for you to check and make sure there are no reporting errors.
If you feel you need to miss a payment on your mortgage, car loan or credit card, it’s really important you contact your lender and come to an agreement. Such deferrals should not be adversely affecting your personal credit report. You can keep track of these free options.
What Is Credit Hygiene, and Why Is It Important?
You can think of credit hygiene the same way you think of personal hygiene. It’s a set of personal habits and behaviours that protects you from “financial sickness”. In the same way that something as simple as regularly washing your hands can protect you from catching the flu (and many other diseases), following credit hygiene rules of thumb can protect you from paying too much, or being told no when you think you can afford that house, or apartment, or car.
If you are employing best practices, then you are automatically optimizing both your credit score and overall credit profile – regardless of who is checking, when they are checking and what is being counted in your score equation.
What Are Credit Hygiene Best Practices?
Having worked with thousands of reports over the years, the following are some of my best practices for overall credit hygiene.
You will note, however, sometimes these suggestions are at odds with other strategies (such as accumulating rewards or minimizing interest costs) and maybe even counter to what other advisors recommend or that your gut says is the right thing to do so, at the end of the day, it is important to decide which agenda is most important for you.
Never Exceed Credit Limits
When you have a tradeline hovering around its limit, you are at risk of going over – which ends up being a dangerous habit to break. And it may happen innocently – you started out under the limit but, with interest charges and possible over-limit penalties, you are now in uncharted territory.
Never go over your credit limit – even when it’s allowed and encouraged. Even when you have a balance transfer promotion or some form of the interest-free period, leave the room at the top.
Much like when you order a coffee, leave the room at the top for cream or milk. Even if you take it black, this helps you avoid spillages.Credit Hygiene Tip 1: Never go over or come close to spending your credit limit. Using too much of your available credit creates the appearance of an out of control spender, and will weigh heavily on your credit score. Click To Tweet
When you have a credit card or line of credit encroaching on its limit, this can make you look like someone who is not in control of your credit. At least, this is how the scoring algorithms will often view you. And extending yourself beyond your limit could result in a large negative impact on your credit score.
Equifax Canada states that percentage utilization has a 30% weighting on your personal credit score. This means that almost a third of your creditworthiness rests on how well you use the credit you already have!
Accept All Offers of Increased Limits
You should always welcome credit limit increases. You look healthier and stronger to anyone checking your credit because your limits have some heft to them. And, as an added bonus, you instantly reduce your percentage utilization on any tradeline with an increased limit. This often results in a higher credit score.Credit Hygiene Tip 2: Always accept offers to increase your credit limit, but try to avoid using the extra credit. Your credit utilization goes down, and the credit score goes up. #CreditHygieneTips Click To Tweet
Spread Your Balances Around
When maximizing your personal credit score, you should look at your utilization of available credit for each individual tradeline. In other words, what percentage of your available credit is the balance being reported?
If you must carry credit balances, try to spread them around – if your goal is to maximize your score at all times.Credit Hygiene Tip 3: If you need to carry a balance, optimize utilization rates by spreading your debt around. Your credit score will be higher than carrying the same total on one credit card with a high balance. #CreditHygieneTips Click To Tweet
Example 1: Joey and Jemma each have three credit cards with limits of $10,000. Joey has zero balances on two of them and owes $9,900 on the third. Jemma prefers to keep a $3,300 balance on each. All other things being equal, Jemma’s credit score will be higher. The reason is Joey’s credit card is reporting a 99% utilization rate, even though both people owe the same amount of money.
Example 2: A furniture or home improvement store offered you “don’t pay for one year”. The balance you are carrying on this card may be relatively small but, if it is at or over the actual card limit, this is dragging down your personal credit score. Consider paying it off now!
Exercise All Cards and Lines of Credit
We tend to favour one particular credit card (maybe we like the rewards program) even if we have multiple cards at our disposal. And most of the time we don’t even need our personal line of credit.
If these trade lines get stale, then they are not pulling their weight. Update the date of last activity (DLA) with a modest transaction and then pay it off online immediately.Credit Hygiene Tip 4: Unused credit doesn't create a strong credit history. Better to use those cards, even when you don't need to, and pay them off immediately for a higher score. #CreditHygieneTips Click To Tweet
If it is a line of credit, just transfer $10 to yourself and then transfer back $10.50 the following day. If you are trying to maximize your credit score, it is good to use all available credit fairly regularly – even if it is just for a nanosecond.
When In Doubt, Do NOT Cancel a Credit Card
Closing an older, unused credit source is rarely the best move as they are contributing to your ‘score juice’. Personal credit is a reflection of your past and present. The older stuff on your credit report carries weight, so it may not be the wisest thing to shut down that history.
If you want to close the card to avoid an annual fee, just ask the card issuer to downgrade your card to a free card – you will retain your valuable history, but avoid annual fees (and the chance of forgetting to pay the fee).Credit Hygiene Tip 5: When you close old credit cards, you erase the good credit history that you previously built with them. Downgrade to no-fee cards, but keep them alive to maintain a higher credit score. #CreditHygieneTips Click To Tweet
Equifax Canada states that your history can have a 15% weighting on your personal credit score, which is quite significant.
Pay Your Active Credit Cards At Least Twice Monthly
Conventional wisdom says that you should wait for your card issuer to send you a statement, then wait out the interest-free grace period before finally paying off your balance just in time to meet the due date.
But there is very little benefit to that these days. In the mid-eighties, when you had money market bank accounts yielding 10% on your savings, then this was important. Savings and chequing account interest rates nowadays are somewhere between pathetic and woeful, so there is a little financial benefit to delaying payment.Credit Hygiene Tip 6: Reduce reported balances by paying twice a month and ahead of due dates. Utilization rates will be lower, payments always on time, interest and late fees gone, and credit score on the rise. #CreditHygieneTips Click To Tweet
I keep track of the statement cycle of my oft-used cards, and I pay the balance in full several days BEFORE the next statement is issued. The card company is going to report my statement date balance to the credit bureaus, so I always want that balance to be small. That way, my utilization ratios remain strong.
And within a week of the statement being issued, I go back in and pay the statement balance in full. This ensures I never have interest charges on my core credit card usage since the balance is always zeroed before the due date.
Pay Disputed Items – Then Argue Your Position
You may have been angered by charges you were certain did not belong on your credit card statement. But, never refuse to pay and wait out the investigation process.
Unfortunately, by doing that, you run two risks:
- By not clearing the balance to zero, everything charged to the card after the next due date will incur credit card interest rates from the date it was charged (19.99% or more from day one)
- And depending on other usages on the card, there is also the risk of late payments being reported to the credit bureaus. These late payments can stay on your record for six years!
My own experience has always been the card issuers do the right thing when fraud or errors are at hand. So, I pay the charge(s) and wait for the credit to come back into my account once the investigation is complete.Credit Hygiene Tip 7: Don't risk interest charges, late payment reports and long-lasting bad credit history by refusing to pay disputed items. Pay first to keep your credit score strong. Then fight. #CreditHygieneTips Click To Tweet
NOTE – if the fraudulent charges are very large or quite serious, this is a different matter altogether. You should strategize the best approach with the authorities and card issuer management.
Use It Or Lose It
If you never borrow money, or you have a credit card in your wallet and you never actually use it, eventually you will have nothing generating a credit score for you. And you may end up with no score at all. We used to call these files a Beacon Reject. (Actually, we still use this dated terminology, even though we don’t ask the credit bureau for the Beacon score anymore.)Credit Hygiene Tip 8: Credit you don't use becomes credit you don't have. It's a rude surprise when you can't get a mortgage because you don't have a credit history. #CreditHygieneTips Click To Tweet
I recently met a new client who has just one modest bank-issued credit card, which she has not used in nearly six years. Her credit score is 787, but in a few months, it will be zero if she doesn’t at least fill up her gas tank using this card.
And some may say great, she gets by without credit – good for her! But she came to me because she is buying a property in a few months and will need a mortgage. So yes, this stuff matters!
Scour and Clean All Reporting Errors
There may be some incorrect information in your personal credit history that is needlessly dragging down your score. Those are easy and necessary fixes. And the impact on your personal credit score can be profound.
A few examples include:
- You have two or more personal profiles with the credit bureau – your information is scattered and diffused. Combining it all into one credit report could very well increase your score. (This often happens to people whose name is hard to spell or who have legally changed their name.)
- Late payments being reported when it is not you. Maybe you have a relative with the exact same name.
- That router you returned to the cable company is showing as a collection even though you returned it to the local store.
- You completed a consumer proposal and all the debts included in the proposal should be reporting zero balances NOT as R9s.
- There may be incorrect late payments – Equifax Canada states payment history has a 35% weighting on your personal credit score.
Let me repeat: errors on your report are bad, and fixing them may be the easiest way to improve your credit score.
There are two credit reporting agencies in Canada. Trans Union Canada, and Equifax Canada. Different lenders and card issuers favour one or the other, and you can go to their websites and purchase a copy of your online report and score anytime.Credit Hygiene Tip 9: Errors on your credit report are surprisingly common, and getting them fixed can be the easiest way to have a big impact on your credit score. #CreditHygieneTips #CreditRenovation Click To Tweet
If you have errors on your personal credit report, mortgage brokers can fast-track an investigation with Equifax Canada for you. This is helpful because when we are submitting your mortgage to a lender, they require an Equifax report from us. What may take you two months or more to tackle on your own could be wrapped up in just a few days if we work together.
The Real Cost of Poor Credit Hygiene
We can understand in abstract terms that a poor credit score means a higher interest rate, or that you might not qualify at all. Bad hygiene is bad. But do you know how costly it can be?
The difference in interest rates between a bad credit score and a good one could easily be 1.5%, and maybe much more. These days, a typical mortgage in the Toronto/GTA area might be $500,000. At current rates, assuming an amortization period of 25 years, the ‘bad credit mortgage’ will cost you an extra $35,600 over the first five years!Poor credit hygiene will cost you about $120,000 on a typical $500,000 mortgage at current rates, and more if interest rates rise. Learn the 9 strategies to maintain good credit hygiene and save big money. #CreditHygieneTips Click To TweetOver twenty-five years, the cost of bad credit hygiene is about $120,000, or about $4,800 extra per year, and that cost increases as mortgage rates climb.
There is a similar penalty cost when you buy or lease a car, and that is assuming you qualify. If you don’t qualify, the cost is no new home or no new car.
We Can Help You Maintain Good Credit Hygiene
A lot of the steps to maintaining healthy credit hygiene include little things you can do consistently to help maintain the strongest score possible.
Have questions about your creditworthiness? I’m here to help.
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- Rebuild Credit Well Before Buying a Home
- Why Is My Mortgage Application Declined?
- Tenants Need Good Credit Too
- Rebuilding Credit After Consumer Proposal Or Bankruptcy
One of Toronto/GTA's Most Trusted and Knowledgable Mortgage Agents
Ross Taylor is recognized by his peers as one of Canada's pre-eminent difficult mortgage specialists. His ASKROSS blog and column in Canadian Mortgage Trends are focused on the intersection between mortgage financing and personal credit.
With unique dual certification as a licensed credit counselor and mortgage agent, Ross's insights are valued by mortgage professionals and homebuyers alike.
If you have questions about anything financial or mortgage-related, please contact [email protected]. Ross answers everyone personally.
For more information, visit About Ross Taylor.