You need to know the rules of the game if you’re going to win. That applies to your credit as much as it applies to the occasional game of Monopoly.
You don’t want to be surprised the next time you apply for financing of some sort and discover your credit score is not where it needs to be because of something you didn’t even realize was a problem.
In this article, we are going to go over the last three rules of the Nine Rules of Credit and talk about some major pitfalls that may be supressing your credit score right now.
- Rule #7: Applying For Credit Lowers Your Score
- Rule #8: Closing Your Credit Accounts Lowers Your Score
- Rule #9: Don’t Let Someone Else Ruin Your Credit
Let’s get started.
Rule #7: Applying For Credit Lowers Your Score
Simply put, the credit reporting agencies want to discourage borrowers from applying for new credit regularly.
In their words:
Even if you’re just comparison shopping for the best rate, too many inquiries can be viewed as a desperate bid to obtain credit to get out of financial trouble.www.equifax.ca
Every time an institution does a credit check on you, it’s considered a “hard pull” and can drop your score from anywhere between 5 and 10 points.
The decrease is generally temporary and your score will bounce back over time, but you can probably see what this could do to your ability to secure financing like a mortgage.
Let’s say you’ve chosen not to work with a mortgage broker.
Big mistake, here’s why.
If you want to shop around to get the best rate for your mortgage, you’re going to have to start the process with a bunch of different lenders.
Even if you just stick to the Big Five banks, each one is going to pull your credit bureau for themselves to assess your financial situation. And each pull is going to count against your credit.
This could mean a decline of 25 to 50 points and that can mean the difference between getting an approval for a reasonable interest rate and not getting approved at all.
The negative impact might be reduced a bit if the credit reporting agencies bunch the credit pulls together as a batch, but they might not as well.
Your best bet is to work with a broker for your mortgage. Brokers pull your credit once instead of multiple times which minimizes the impact on your credit score.
For something like buying a car, another good tip is to pull your own credit bureau and then use it when shopping around. You can personally request your own credit as many times as you like without hurting your score, and it won’t show up on the list of inquiries.
Read the fine print
Be careful what you sign. It’s almost a cliché at this point, but you should always read the fine print. Especially if you’re in the middle of securing a mortgage or you will be in the near future.
Many common services like cell phone carriers and internet providers may or may not check your credit as part of the deal.
Chances are it was part of the contract you signed so they can potentially pull your bureau in the future without additional written consent.
This could really throw a wrench in your plans if you’re in the middle of trying to secure financing. This is why it’s a good idea to check your credit yourself before you begin the process and know where you stand.
The only way you can be sure a company isn’t pulling your credit is by not giving them your information in the first place.
Rule #8: Closing Your Credit Accounts Lowers Your Score
Remember Rule #3?
If you want your credit score to rise, you have to start building up a solid history of good credit behaviour.
Well, guess what happens when you close one of your credit accounts.
Your whole history of on time payments disappears.
Every time you close an account, your credit score is going to take a hit since your credit history vanishes along side it. Since the length of your credit history and record of payments makes up nearly 50% of the contributing factors towards your score, that can be a big problem.
And that doesn’t even mention the fact that you would be reducing your overall combined credit limit, which is a positive factor in determining your score.
Part of the trouble with credit is that oftentimes the people in the industry selling you the financing products don’t know the rules either!
If you’re working with a lender and they want you to close some of your existing accounts as part of the deal, try to work with the representative to see if there is an alternative they would be happy with.
Rule #9: Don’t Let Someone Else Wreck Your Credit
According to the Identity Theft Resource Center’s report, “Identity Theft: The Aftermath 2016” nearly 20 percent of Americans surveyed were the victim of some kind of criminal identity theft in 2015.
It’s all too easy and common for someone to find themselves a victim of credit card fraud. Don’t make it easier for the fraudsters to get your info by throwing out your statements without shredding them first.
Always destroy your financial documents instead of just tossing them in the recycling bin.
It can take years to build up your credit history, but it doesn’t take long to destroy it. Protect your personal information, especially your SIN.
Don’t put your info into any even remotely suspicious websites, don’t answer that email from the Nigerian prince, and be careful what you reveal to someone calling you on the phone claiming to be from the CRA.
Another big tip is to get everything in writing. You can never be sure a debt is paid off without written confirmation. Don’t pay a charging company unless they will give you something in writing that says the account has a zero dollar balance.
Cosigning is another big hazard.
In addition to the risk of fraud, you have to be aware of the dangers of cosigning for someone you know. When you cosign for someone else’s credit account, you are 100% liable for their debts.
Giving someone the power to wreak havoc on your credit score, even if they have the best of intentions, is generally a bad idea. A better option, if the person can’t qualify on their own is for them to look at getting a secured credit card and building their own credit.
While you’re at it, tell them to read the last three articles in this series and give them a good start to building or rebuilding their credit too.
And those are the Nine Rules of Credit. If you want a more in depth explanation, check out the book by Richard Moxley.
Remember, when it comes to getting financing like a mortgage, your credit score is only one piece of the puzzle. The five C’s of credit play a major role is whether you get approved for the financing you need or not. For more tips about how to secure the best rate for your mortgage, join the Ardent email list down below.