Your credit score is an important instrument for you to use as you try to build a healthy financial situation for yourself. Good credit can make it easier to get loans, credit cards, lines of credit, and many other financial benefits that we often need to make significant changes or advancements in our lives.
The tricky thing about credit, though, is that it takes a long time to build, and seemingly minor mistakes can really hurt your score for a period of time.
We're going to take a look at some of the ways that credit operates in this article, answering questions like "how long do collections stay on your credit report in Canada?"
Hopefully, the information below can help you get your credit in line and repair your score if it's hurting a little bit.
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First Things First: Credit Basics
It's important to note that your credit score is a history of your own credit that lenders use to assess how worthy you are to receive a loan and pay it back. This is called your creditworthiness, and it dictates the types of loans you're eligible to receive, the interest rates you're granted, and more depending on the circumstances.
Lenders and other institutions that you're indebted to will report your behavior to the institutions TransUnion and Equifax. These two credit bureaus cultivate your information, run it through an algorithm, and turn out a score that reflects your creditworthiness.
Some of the things that negatively influence your credit are payment histories, bounced checks, instances of fraud, bankruptcies, delinquent balances on credit cards, collections, garnishments, and more.
The alternative is that your score is benefited when you do well in the metrics listed above. For example, great payment histories, longstanding accounts, and multiple lines of responsible credit can all benefit your score over time.
Canadian credit scores can be ranked from very poor to excellent, with a few categories in between. Anything from 300 up to 579 is considered very poor, while anything from 780 to 900 is thought to be excellent. If you don't know your credit score, you can check it here.
How Long Do Collections Stay on Your Credit Report in Canada?
The fortunate thing about negative blows to your credit is that they don't remain on your score forever. In fact, positive marks on your credit score will stick around a lot longer than negative ones do because there are so many more opportunities for you to hurt your credit than there are to benefit it.
When it comes to collections, you can expect those marks to stay on your credit score for 6 years from the date of your last payment. Collections occur when you are delinquent for a period of time on some form of payment and haven't arranged with the lender to adjust or repair the situation.
In most cases, collections will come after a period of one or two months without payment.
Another fortunate thing to keep in mind is that collections marks on your credit score will affect you less the older they get. The fresher the collections statements, the more significant the effect on your score.
Other Negative Factors and Their Lengths
Let's take a look at some of the other factors that can ding your credit and for how long those factors will stick around on your credit report.
Missed Credit Card Payments
Credit cards are one spot that holds a lot of room for improving credit, but can just as quickly harm your credit for a long period of time. If you fail to pay your credit card bills, you can expect to see those dings on your credit for about six years.
Using a credit card as a method of building credit is extremely effective, though. It's never a bad idea to take out a credit card that your credit allows and use it once per month and simply pay off the balance as soon as you use it.
The amount of money that you spend on the card isn't as significant as the fact that you use it often and pay the bills back on time. "Often," in this case, simply means that you use the card once each pay period and can pay the amount back each time.
Personal loans are another tricky area that can get people into hot water sometimes. Missed payments and delinquencies on loans can stay on your credit for six years as well.
One thing to look out for when you're taking out small personal loans is predatory lending. Predatory lenders are those that offer quick cash solutions such as payday loans. Payday loans, for example, offer you a loan to get you by before you get paid, when you're expected to pay some or all of the loan back.
The difficulty is that those companies know that many people won't be able to pay those loans back on time, and they offer up extremely high-interest rates and late fees in advance.
As that snowball keeps rolling, people can be sent into financial ruin. Each pay-period that's missed contributes more fines to the principal loans which accelerate even faster because of the high-interest rate.
Make sure that the loan you take out comes from a lender that's well-respected and trusted by members of your community.
Instances of insufficient funds are simply when you don't have enough money in your account to cover a cheque or withdrawal. This may also be called non-sufficient funds or (NSF)
Verifying Your Credit Report
There's a slight chance that different credit bureaus won't get your report exactly right, so it's important that you look over everything that's reported on it.
You can look at your credit report on one of the credit bureau websites or through websites like Borrowell or Credit Verify Just peruse what your report says and make sure that there aren't any problems with it.
It's more likely that you would experience some kind of identity fraud than it is that there will be a mistake. In those cases, you'll notice unusual behavior that you took no part in coming up on your report.
This is the primary reason that you should keep a close eye on your credit report, or at the very least set up a program where you're alerted when there are changes to your score or your report.
When someone steals your identity, there's a good chance that they'll take out new lines of credit or spend your funds in ways that will affect your credit. The sooner you can catch those instances of fraud, the more likely you are to catch the person who's stolen your identity and prevent further dings to your credit.
Effective Methods of Improving Credit
If you're looking to boost your credit or start building your credit, there are a number of great ways that you can get started and avoid pitfalls along the way.
Let's take a look at some of the things you should be doing to work toward an excellent score.
It seems like a no-brainer, but it is truly important that you focus on your financial obligations that have bills. Things like rent, utilities, and especially loans.
Without your credit score in mind, it might seem like an alright idea to skip out on a payment or two, but it's important to remember that missed payments can lead to dings to your score. There are some instances where a slightly late utility bill or rent payment won't be reported back to the credit bureaus, but it's difficult to know when companies or municipalities will let those minor things slide.
With that in mind, it's always best to prioritize those bills and never let them slip. One way to safeguard yourself against late payments is to avoid financial obligations that you aren't absolutely sure you can fulfil.
Knock Your Debts Away
When you've got a few spare dollars saved at the end of the month, your credit score will thank you if you put that savings toward your principal loan payment.
Your debt-to-income ratio is a factor in your credit score, and the more you can chip away at the principal value of your debts, the better.
That said, every little bit helps when it comes to knocking away at the ratio. Additionally, the more you chip away, the less you'll have to pay in the long-run over the life of whatever loan you're re-paying.
Don't Cancel Old Accounts
It might seem like a good idea to cancel credit card accounts that you're no longer using, but the opposite is actually true.
Your credit score benefits from examples of longstanding credit, and the longer you're using a credit card, the better. Even if you're not actively using the card, it's a good thing to keep it open so you can keep racking up the age of your credit.
Don't Open Too Many Lines of Credit
Each time you have an inquiry, your credit score will go down marginally. It's a matter of 3-6 points in most cases, but those inquiries will add up over time and leave you with a significantly worse score.
So, if you can avoid taking out new lines of credit such as credit cards or other small loans, you should do so. If you do need to take out a few different lines of credit, though, make sure you don't do so in a short period of time.
When you request lines of credit too frequently, it's an indication that you won't be able to pay them back. This isn't to say that you, personally, won't be able to pay those lines of credit back, but it's a statistical indication.
The best way that lenders have to check your creditworthiness is to use these factors and run them against what is statistically significant in the data. So, just because you were late on a mortgage payment or two doesn't mean that you aren't actually creditworthy, but statistics say that you're less likely to be after those instances.
Be Safe With Your Information
Make sure that you're protecting your personal information as best you can online. That means having an anti-virus software, changing up your passwords, and limiting the use of applications that access your financial information while you're on public WiFi networks.
Again, instances when someone steals your identity and uses it to take out lines of credit or mess with your financial health can be extremely damaging to your credit. Even though it's not your fault that these things happen, it's still incredibly difficult to get them wiped off of your financial history and credit report.
Preventative measures like protecting your passwords and staying away from public WiFi networks can help, but the best way to ensure that you're not being sabotaged is to keep up on your credit report.
Looking into your own credit score isn't going to ding you down any points, so it's a good practice to make the habit of checking your score weekly or monthly. This way, you'll be on the front end of anything that might happen.
Create a Tight Budget
At the end of the day, your creditworthiness and your financial health are both indications of how well you manage your finances. If you can establish a budget and stick to it throughout 2021, you might find that your credit improves and you have a little extra cash in your pocket.
That cash might be a great little chunk of a down payment for a home or a significant portion of a principal loan value.
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