What I’m about to discuss is important for everyone. However, this post is addressed to women in particular for one key reason: We tend to be more financially vulnerable. In case you haven’t guessed it yet, I’m talking about your Credit Score, otherwise known as your Beacon score. Let’s look at what it is and why it really matters to you.
In our Rent to Own business we see a lot of bruised credit profiles come across our desk and sadly many belong to women who have been through traumatic events like divorce. In other cases, women have no credit profile because their spouse has been the one who obtained all of the loans for whatever reason. If you have no Credit Score or a low score, you are vulnerable and your options may be severely limited.
What’s your Beacon score?
Let’s get straight to the key question: Do you know your Beacon score? Secondly, do you know why it matters? If you’ve ever tried to borrow money, get a credit card or rent an apartment, chances are that someone looked at your Credit Report to determine how likely it is that you’ll honour your financial obligations. In Canada, our credit history is recorded by three key agencies: Equifax, TransUnion and Northern Credit Bureau. These agencies keep track of key financial and personal information that banks, lenders and other businesses use to determine your risk profile. The good news is that no one can access this information unless you give them permission. The bad news is that this information is required for financial transactions where you are asking for a loan or for credit. If you refuse, you don’t get the money, the card or in some cases, the apartment. You may not need money or a loan now, but some day you will so it behooves you to pay attention to your score and to do everything you can to keep it high.
So how does the scoring system work?
In a nutshell, it’s complicated. Equifax and TransUnion use a scale from 300 to 900. If you have no credit history, you’re charmingly called a “Beacon reject” which essentially means that they have nothing on you. While it’s great that you have not developed a challenging profile, it’s not helpful that you have no history. Lenders typically don’t open the vault unless they have a Beacon score with which to evaluate your file. If you do have a Beacon score, then from a lending perspective it boils down to this: a good score makes you interesting to A-lenders (i.e. banks with better rates). If your score starts to get lower, then you’re in B-lender territory (i.e. alternate lenders or private lenders and higher rates). If your score drops down too low then no one will touch you. The precise line in the sand varies by lender but the goal remains the same: You want your score to be as high as possible to give you the most options and the best rates.
There are a number of factors that influence your score. The following is a partial list that addresses some of the biggest influences:
The more inquiries you have on your file, the more it looks like you’re shopping for more money or credit and therefore your risk factor goes up. Net effect: Your score goes down. Be careful about buying in to retail store offers for x% off if you get their credit card today only! Or the countless “freebie” credit card offers you get in the mail. Or having multiple car companies pull your credit when you’re shopping around. Be strategic about your purchases and your cards. Tell companies that they may not pull your credit to offer you a quote. They will have to do so if you proceed with them but then that’s one hit versus many.
These are bad for your credit, period. If you’ve got a collection outstanding, pay if off or resolve the issue asap. Don’t let a collection drag on for ages. You may end up winning the war (the amount owing) but losing the battle (your credit score).
In a previous blog post Tackle debt or save money – Which is better? I addressed the issue of credit cards. If you maintain high account balances, it can be a signal to potential lenders that you are not living within your means and the result is a negative effect on your credit score. The ideal situation is to use your credit cards regularly and then pay off the balances in full when due every month. You need to use the cards to establish a credit history but you need to use them wisely in order for it to have a positive effect on your score. If you can’t pay off the full balance right away, then be sure to keep the balance below 35% of your credit limit.
Equifax and TransUnion report the rating of your credit items on a scale of 1 to 9. A rating of 1 means that you pay your bills on time. A rating of 9 means that you don’t repay your debts or you have a proposal for repayment. Every time you make a late payment, it gets noted on your credit bureau report. The longer the delinquency, the worse the score. The solution is pretty simple: Pay your bills and your debts on time in order to maintain your score.
Some of our clients have avoided getting credit cards or loans of any kind because they fear it will lead them astray. Sadly they’re not developing any credit profile as a result. You need credit and you need to use it well in order to develop a good Beacon score. The general rule of thumb for lenders is what we call the 2/2/2 Rule: 2 Credit Lines with a credit limit of at least $2,000 for 2 years. That’s the minimum you want to have in order to develop a good score.
Too much credit
This is a difficult one. On the one hand, lenders want to see that you have credit and that you know how to use it well. On the other hand, they don’t want to see too much credit because that poses a risk to them. As a result, too much available credit can hurt your credit score. If your wallet is stuffed with cards then it may be time to do a triage down to the best cards for you. Bear in mind that older credit trumps new credit so be sure to hang on to the cards you’ve had for a while. If you’re unsure of what to do and which cards to eliminate, talk to an experienced mortgage agent. If you’re in Ottawa, email me and I can recommend a number of great people.
Here’s a surprising fact: Credit reporting agencies makes mistakes and sadly they’re not uncommon. Therefore it’s a good idea to pull your own credit at least once a year to ensure that the information is accurate and up-to-date. When you order your own report, there is no hit to your Beacon score so there is no reason to avoid doing it. At Equifax you can get a copy of your report along with your score for $23.95: http://www.consumer.equifax.ca/home/en_ca. To use TransUnion just click on the following link: http://www.transunion.ca/ca/personal/personal_en.page. We suggest you make it part of your New Year’s ritual to check your credit at the start of every year. Or use your birthday as a reminder – whatever works.
One last word for women: Having a strong Beacon Score is a key part of setting yourself up for financial success. Check your score today and don’t be discouraged if it’s low. Every challenge from your past can be reversed with time and good habits. We’ve seen it over and over again in our business and we’ve helped dozens of families move from credit challenges to strong credit scores. The process is the same for everyone: good decisions, one step at a time. Having a good credit score is also essential in protecting yourself in the event that you find yourself suddenly alone. I know that everyone thinks it won’t happen to them, but I’ve experienced loss and seen countless others go through that process too. It happens all too often. I’m writing a book about the lessons that I’ve learned and I’m interviewing women who have been through loss and divorce to hear what they recommend to other women based on their own experiences. You can read about those lessons and some of the stories here: www.ifihadknownbook.com. Bottom line: Be wise and protect yourself. Protection starts with a good credit score.