Fixing and Maintaining your Credit Rating – Common Traps and Pitfalls
By Ian Penney, CA, CIRP, Licensed Insolvency Trustee
Here is a typical scenario:
In my early twenties, I had a collection agency chasing me. They called me at home and at work, sometimes 15 or 20 times a day. They even called my former roommates and my parents, told them that I didn’t pay my bills and tried to convince them to pay them for me. Until I paid in full, they made my life miserable.
It all started innocently. I had worked a part-time job in retail for several years in my teens while I was going to school and was offered a store credit card with a $700 limit. I quickly racked-up the card by buying discounted clothes from the store I worked in. I then switched to a serving job and forgot to pay-off that store credit card. I made small payments now and then at first, but it was pretty much out of sight, out of mind. Soon after, I moved, the bills stopped getting to me and the debt was forgotten completely.
A year or so later, I was faced with a collection agency calling to collect the $1,000 or so dollars I now owed. In order to stop the harassment, I ended up having to dip into my student loan money to pay off the debt. While it made that semester financially difficult, luckily it all worked out.
It was an expensive lesson to learn. In addition to the several hundred dollars I had paid in interest and the shame and embarrassment I endured, it also took me several years to get my credit rating back on track. Letting a credit card balance languish is a credit no-no that I simply didn’t know about (I blame it on the ignorance of youth), but maintaining a good credit score takes more than just paying all your bills on time every month.
Here are five other things that can damage your credit rating:
Applying for Lots of Credit
Many people apply for a credit card in every store that they are offered. A large number of “hard pulls” (formal inquiries on your credit for the purpose of obtaining new credit) can make you seem like a bigger risk to lenders.
Furthermore, being declined for credit, such as a new car loan or consolidation loan, may also damaging to your credit rating.
It could appear to potential lenders that you are having difficulty managing your money and that financial trouble could be coming. Furthermore, if several of these new cards/loans are approved at once, you will have all this credit, but insufficient income to handle it.
Too Much Available Credit
If you have a number of credits cards and a huge amount of “room” on each of those cards, you might think that would demonstrate responsible use of credit. However, having a huge amount of unused credit available won’t necessarily endear you to a lender when you are applying for a loan.
The lender may see all the available credit and think that if you max out on all this credit, you are going to have way too much debt in comparison to your income. Therefore, adding another loan could be quite risky for them.
If you and your ex-spouse signed a credit agreement jointly, be aware that you may be responsible for any debts incurred by your ex, even after you separate and even if the debts were divided as part of the divorce agreement.
The lender doesn’t care that you are divorced and as part of the settlement, the ex agreed to pay that credit card off. If your spouse isn’t paying, then it’s your responsibility to pay the entire balance (not half as many people think) unless the lender has formally released you from that debt.
Not Using your Credit Card
Some debtors think that hiding their credit card away and rarely using it maintains good credit. However, these people fail to realize that part of your credit score is based on your payment history, so not using your card could actually hurt you as the lender can’t adequately establish that you are a good payer. In fact, showing repetitive payments demonstrates that you are a better risk for the creditor.
In fact, a strategy for people with damaged credit can be to obtain a secured credit card (you advance the lender cash to hold on deposit) and make regular monthly payments to rebuild their credit score.
Parking Tickets, Utility Bills and Other Fines
If you don’t pay parking tickets, phone bills or even library fines, these creditors will eventually want to collect. If it ends up in the hands of a collection agency, even seemingly harmless debts are going to affect your credit score.
If you have bills, loans and/or credit card balances and can’t make ends meet, contact one of Janes & Noseworthy’s personal debt experts to discuss your options. Bankruptcy is not the only answer. We can customize a program to suit your situation.
Ian has been helping individuals in financial difficulty for over 20 years.
He is a chartered accountant, a chartered insolvency and restructuring professional and is licensed by the federal government to administer bankruptcies and consumer proposals.
He leads Newfoundland and Labrador’s largest group of personal debt experts with offices in St. John’s, Bay Roberts, Marystown, Gander, Grand Falls-Windsor and Corner Brook.