How Your Credit Fluctuates
Everyone wants a long credit history, a good credit score and a healthy credit report that is devoid of errors. The great news is that everyone can have those things, whether you’re working from the ground up or are just looking to fix a few past mistakes.
It’s essential when you’re learning to build, improve, or fix your credit, that you also learn about what types of credit habits or situations should be avoided, as well as how those habits cause your credit score to fluctuate.
How Do Your Credit Habits Affect Your Credit Report and Score?
All of your financial habits, the good ones, and the bad ones, affect both your credit report and your credit score. There is no way to hide how you’ve been handling your credit cards, debts, loans, payments, and limits from either of Canada’s two credit reporting agencies, Equifax or TransUnion. If you have any type of credit product, whether it’s a simple credit card or a long-term mortgage, it’s important that you understand how these products affect your credit when you use them.
Want to know how your payment history affects your credit? Read this.
Factors That Negatively Impact Your Credit
Irresponsible or unhealthy habits concerning your use of credit and loan products will, without a doubt, negatively impact your credit score.
Carrying Too Much Debt
Both negative and positive debt are the largest contributors to your credit score. Having too much debt and a low credit score may prevent you from getting approved for the financial products you need. Banks, lenders, and credit providers take into account how much debt a potential borrower has in order to determine their level of risk. The logic behind this is that if you already have too many credit payments to make at the same time, you may accidentally skip or forget a few or you may be financially unable to pay them all.
To learn about consumer debt, look here.
Serious Misuse of Credit Cards
Irresponsible use of credit cards is one of the easier ways to ruin your credit, so easy that you probably won’t even realize what you’re doing until the damage has already been done. You might be wondering what exactly “serious misuse” or what “irresponsible use” entails. Let’s take a look:
- Maxed out credit cards. This should be avoided whenever possible, as it will illustrate to future lenders/creditors that you are unable to keep your spending under control. Read this to know what happens if you stop paying your credit card bills.
- Applying for too many credit cards within a short period of time. Every time you apply for credit, your potential creditor performs a credit check. This will show up as a hard inquiry on your credit report and lower your credit score by a few points for a short period of time.
- Opening numerous accounts quickly. If you get approved for and open several new credit accounts quickly, you’ll be reducing the average age of your credit history. As we’ve discussed in previous articles, the longer your accounts have been open, the better. Furthermore, having numerous credit cards may tempt you to overspend. To discover how applying for new credit affects your credit score, look here.
- Letting others use your credit card. Since it’s your money, credit score, and financial health on the line, you should be the only one who is able to make charges on your card. Others won’t have the same incentives to use your credit card as responsibly as you.
- Forgetting to check your credit card statements. Unfortunately, fraud and errors happen and the more time you wait to deal with either of these issues, the more difficult it may be to fix them.
Using No Credit Products At All
If you want a good credit score, you need to have a credit history. Your credit history is a record of all your credit and loan payments, behaviors, and habits. If you don’t use any type of credit product (credit cards, loans, lines of credit, etc.) you won’t have a credit history. Not using credit won’t give you a bad credit score; you simply won’t have a credit score at all.
So, what’s worse, a bad credit history or no credit history at all? The bottom line is that both situations aren’t great because they make you a high-risk borrower. Either a lender is taking a risk because you have no history of payments or they’re taking a risk because you have bad credit.
Missing a personal loan payment, mortgage payment, or credit card payment is a surefire way of ruining your credit score. Your payment history represents how well or how poorly you’re able to handle credit products. Too many missed payments will not only lower your credit score and appear on your credit report, but they may prevent future creditors from approving you or offering you a reasonable interest rate.
Having a long history of responsible credit usage and payments is very important if you want to have a good credit score. Therefore, if you feel as though you have too many credit accounts open or you’ve finally paid one off, do not close them just to prevent yourself from using them. Closing a credit account will affect your credit score in two ways: credit history and credit utilization.
- Credit history: closing accounts will decrease the overall length of your credit history which will, in return, limit the amount of information future creditors have to assess your creditworthiness.
- Credit utilization: closing an account will decrease your available credit. This will hurt your credit score because the amount of available credit you have, decreases compared to the amount of debt you have.
Filing a consumer proposal in Canada will negatively impact your credit, but can be a helpful tool for those with serious debt issues.
A consumer proposal is a debt relief option that is less drastic than bankruptcy. It’s an agreement that’s struck between you and your creditors, negotiated by a Licensed Insolvency Trustee. You and your trustee will create a proposal that details what you can afford to repay. Your creditors can then either accept it or decline it.
As we mentioned before, within your credit report, each of your accounts is given a credit rating, R1 to R9. When an account is part of a consumer proposal, it will receive an R7 rating. The R7 rating will remain on your credit report for the time it takes you to complete your repayment plan, plus an additional 3 years.
How long does it take for a consumer proposal to be accepted or rejected? Find out here.
When you file for bankruptcy in Canada, it will appear on your credit report, and your credit score will be negatively affected. If you’re filing for bankruptcy for the first time, it will be visible on your credit report for 6 years after your debts are discharged. If you ever file a second bankruptcy, it will remain on your credit report for 14 years.
An R9 rating is the worst credit rating that an account can have. It means that the account has been sent to collections or is part of a bankruptcy filing. Once the 6-year period is up, this rating will no longer appear on your credit report.
Growing Your Credit Score
While you may be currently struggling with low credit because of past financial mistakes, the great thing about your credit is that it’s just that, yours. You have the ability to improve and grow it so that you can gain access to the products and services you want.