How Important Is Your Credit Rating?
When you're in the market for a loan, mortgage, or credit card, your personal credit report is one of the primary tools lenders use to make their decision.
Did you know that 47% of credit reports are reported to have inaccurate or missing information, which in some cases would have resulted in higher interest rates or even declined credit? Here is some information about how to assess and manage your credit.
- How can I know if I am a good credit risk?
- Figuring out your debt ratio
- How can I maintain good credit?
- What can I do if I feel that I am a victim of credit/identity fraud?
How can I know if I am a good credit risk?
There are many factors that affect your Canada credit worthiness. They are:
- Number of credit accounts and the history of the accounts that are open
- Amount of each account and the balance owing on each account
- Payment patterns
- Types of credit
- How often and how recently you apply for credit
There is another way to determine if you are a good credit risk. That is by determining your debt ratio. Mortgage lenders generally won't approve your loan if your mortgage debt would exceed 30% of your income. Your total debt ratio -- including all other debts -- should not exceed 40% to qualify for a mortgage.
These debts don't include food, utilities or taxes that you pay. For these calculations, mortgage lenders look at items like credit card bills, student loans and car loans and how your mortgage would affect your overall ability to pay.
Figuring your Debt Ratio
List all your bills in one column. In the second column list your monthly payments. In the third column list your balance due.
Of course, credit cards don't have a monthly payment so use this option: Estimate your monthly payments as 3% of the balance. In other words, if you owe $1,000, list your monthly payment as $30 ($1,000 times .03.)
Now you must figure your monthly income. Start with your gross annual income, which is your income before taxes. Add to that -- also on an annual basis -- any other income such as investment earnings, child support, alimony, Canadian Social Security benefits, free-lance income from consulting. You should not include any overtime or bonus money unless it's guaranteed. If your income is based on an hourly wage, multiply your average weekly paycheck by 52 weeks to come up with an estimated annual income. Be sure to use the gross income figure, which is your weekly income before tax.
Now divide your monthly debt payments by your total monthly income. So, if your total monthly income is $2,500 and your total monthly debt payments are $850, your debt-to-income ratio is $850 divided by 2,500 or .34, which is 34%.
Where does your Canadian Credit stand?
Use these guidelines:
10% or less: You probably won't be surprised to know you're in great shape. Because lenders view you so favorably, make certain you have good, low-rate cards.
11% to 20%: You shouldn't have trouble getting loans but to be sure contact the Canadian credit bureau. As you approach 20%, you've probably taken on too much debt. Scale back, particularly if buying a house is on your agenda.
21% to 35%: Stop charging! Although you probably aren't having trouble getting new credit cards, you're spending too much of your monthly income on debt repayment. You're probably having trouble saving money.
36% to 50%: Cut up your cards and develop a plan to get out of debt.
More than 50%: You need help. Make an appointment to see a credit counselor or a financial adviser to talk about your credit rating and how to save. Don't panic. You're not alone. Get started whittling down your debt.
How can I maintain good credit?
It is very important that you maintain a good credit profile. The best time to do this is once you get your first credit loan. By paying your bills on time, paying off your bills in the time required and by not overextending your credit debt you can be assured a good credit standing. Avoiding bad registered items, collections and judgments will prevent warning flags arising during a credit check. It may be very difficult to obtain credit if you have filed bankruptcy within the last seven years or else you may have to pay excessive interest rates. Reviewing your credit report annually will help detect inaccuracies, which if allowed to remain on your report may affect your credit rating. Also, it allows you to check for possible identity fraud.
What can I do if I feel that I am a victim of credit/identity fraud?