Your credit report is very important. It is used not only by lenders whom you’ve applied to for credit, it can also be used by employers or even various service providers to validate your level of risk. Understanding your credit report is the best way to ensure it is updated and correct.
Important Aspects of Your Credit Report
There are two important aspects of your credit report, both regarding credit behaviour: how much credit you’ve used and how you pay your credit.
- How much credit you’ve used
If you have a lot of credit at their maximum balances, this can negatively impact your credit score. For example, if your credit balances are close to, at, or over the credit limits, this will damage credit and trigger a message: “proportion of balances are too high to credit limits”. Simply having too many credit cards and loans can even have an impact. Trying to maintain a balance of less that 50% of your available credit is a smart way to avoid this.
Too many credit applications in a calendar year can also hurt your credit. Applying for credit on a regular basis implies that you are a credit seeker, someone living outside their means. This is often a major red flag for lenders.
- How you pay your credit
Making payments on time is critical – all the time. Any late payments are reflected on your report.
If you are 1-5 months behind and then you pay up to date, your overall rating will be restored to ‘up to date’ and in good standing – but the record of the late payment will remain on your credit report for 6 years from the date of last activity.
However, if you are behind 6 months or more and there is a repossession, the rating remains bad for 6 years from the date of last activity – whether you pay it up to date or not.
These behaviours impact your credit score – a number that lenders use as partial validation regarding your level of risk. Your credit score is a number that is calculated based on all the activity on your credit report.
Here are some of the best ways to maintain credit:
- Don’t apply too often for a credit report – gym memberships, store cards, opening bank accounts and even insurance companies can ask you to provide a credit report. Only let companies run a credit report if you need the credit (not because you want that free blender promo at the mall).
- Pay your bills on time – all the time. Even one late payment can have an impact.
- Don’t overdo it with the credit cards. If you have too many already, look at paying some off and as each is paid off, begin closing out the accounts. Even if you don’t use all the cards, having a wallet-full can be detrimental.
- Only use your cards to spend as much as you can pay in full each month – do not run up high balances on credit cards.
- Loans are better credit products for your credit report than credit cards because they are not revolving and have a fixed repayment term.
If you have damaged your credit, the only way to fix it is to clear up the bad credit and rebuild. Step one is getting your credit report from Equifax AND TransUnion and creating a plan to get rid of those overhanging debts and rebuild.
At Spergel, we can help you deal with problem debts and advise you on the best route to rebuilding a strong financial future.