6 mistakes you could be making with your credit and how to avoid them

July 15, 2022
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5 mins
6 mistakes you could be making with your credit and how to avoid them
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How credit utilization, rate shopping, and other factors can impact your credit score

There is an old expression that still holds true when it comes to credit: “your best teacher is your last mistake.” While we agree with this, we also want to help you avoid learning the hard way. It’s possible you’ve already made a couple of these mistakes, that’s okay, knowing what they are is the first step.  

In this article, we’ve provided you with helpful solutions for 6 common mistakes you need to look out for when it comes to your credit, so that you can either avoid or fix them.

Your credit score impacts your ability to borrow, which affects your ability to make larger purchases.

Without further adieu, here are 6 mistakes you could be making with your credit that might be negatively impacting your credit score.

#1 Credit monitoring: you’re not monitoring your credit score on a regular basis

According to surveys conducted by national research firms, over 50% of Canadians have never checked their credit score. If this includes you, you’re definitely not alone. It’s very common for people to neglect this aspect of their credit upkeep, even though it’s a simple and straightforward process.

So what is credit monitoring? It’s the practice of regularly checking your credit report, history, and score. This has many valuable benefits, like helping you catch any mistakes, identifying questionable entries, and letting you better understand your credit history.

Does checking your own credit hurt your credit score? Absolutely not! Keep in mind there is a difference between you checking it and a creditor pulling it. All Canadians can check their credit for free in just a few minutes by visiting major credit bureau websites.

#2 Credit utilization: you’re pushing the limits

What exactly is credit utilization? It’s the amount of credit you are using currently, versus your limit, for example:  

Current Balance ÷ Limit = _____ x 100 = ____% 

Let’s say you have a $5,000 credit limit, of which you normally use $1,000 each month, this equals a 20% credit utilization ratio. 

Your credit score will be impacted by how much you’re using at any given time. A lower ratio has a positive impact on your credit score while a higher ratio can have the opposite effect. So if your credit spending jumps to $4,000 one month (80% credit utilization ratio) and you continue to hold a high ratio, your score would likely decline to some degree.

Pro Tip: Only use 30% of your credit limit each month to increase your credit score

#3 Credit checks: you’ve made too many credit pulls

Rate shopping is checking multiple lenders when you need to borrow money. If you’re on the hunt for a new mortgage, auto loan, or other credit, then you’ll likely be doing some rate shopping to find the best possible terms, because who doesn’t like a deal?

A hard credit inquiry is also called a credit pull. This is an assessment of your creditworthiness made by a lender when you make a credit application. 

It’s important to avoid making too many pulls. Why does this matter? Too many pulls in the course of a year can indicate that a person’s financial situation is unstable. However, looking for a deal is an accepted part of being a consumer, and credit bureaus don’t want to penalize you for being a smart shopper. 

To balance these two elements, rate shopping periods are usually confined to 30 days. This means that as long as it’s the same type of application activity (for example, a car or a mortgage application, not both) and within the same month, you can make multiple enquiries in order to get the best deal for yourself. 

In short, gather all of your personal financial information together beforehand, and try to keep your applications within a 2 or 3week period. That way you’ll be sure to avoid a credit score decline, which comes by making multiple applications that are spaced too far apart.

#4 Loan co-signing: you’ve co-signed a loan to help someone out

Co-signing is when you add your name to a primary applicant's loan because that person doesn’t qualify. At the end of the day, it’s your decision if you want to co-sign a loan. Just make sure that the person you are helping out is responsible. Carefully assess your finances beforehand, and be prepared to cover the loan payments, just in case.

If you have a strong credit score, then co-signing for someone can increase their chances of being approved, or lower the interest rate they are offered. This sounds like a very nice thing to do, and it could surely help a friend or family member in need, just remember that when you co-sign you are responsible for that loan.

#5 Diversified credit: you only have one type of credit

Your credit mix is determined by how many types of credit you have. This includes the two primary types of credit: revolving credit and instalment credit.  

Instalment credit means you make a series of payments, usually on a weekly or monthly basis, with a fixed end date when the loan will be paid off. This typically consists of auto loans or personal loans. 

Revolving credit doesn’t have a set end date, but rather a minimum payment that you need to make each week or month. Credit cards are the most common type of revolving credit, followed by a home equity line of credit (HELOC).

The best mix of credit includes a blend of both instalment and revolving credit. This demonstrates your ability to manage a variety of credit types. 

#6 Payment status: delinquent

Your credit score will take a hit from late or missed payments, which are reported to credit bureaus. It’s really important to make sure your payments are made in full and on time to avoid impacting your credit score. 

If you absolutely can’t avoid missing a payment then consider giving your creditor a call and making alternative arrangements. They’re often more understanding if you give them some advance notice, so be proactive.

Final thoughts: why does your credit score matter?

There are many reasons why credit scores are critical. Most importantly, lenders are going to check and see how you’ve handled credit before to determine how you will handle it in the future. 

Pretty straightforward, right? Credit card companies, car dealerships, and mortgage lenders will carefully review your credit history prior to deciding how much they will loan you, and at what interest rate. Insurance brokers, landlords, and potential employers may look at your credit before they provide you with coverage, rent you a home, or offer you a job. 

Bottom line? You’ll want to carefully consider all 6 of the factors we have discussed in this article. Your credit is what enables you to borrow money, insure your possessions, and even obtain employment. Having a high credit score means better access to financial resources, and the opportunity for a more enjoyable quality of life.

This article provides information and is not intended to provide any personalized tax, investment, financial, or legal advice. You are encouraged to seek professional advice before making financial decisions.

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