Our expert Mubina, A CFA, explains how to minimize how much your bad credit score impacts those around you.
The question
Good afternoon,
Terrance K., St. John’s, Newfoundland
Need some advice. I fell on hard times a little while back. My credit score took a big hit. I’ve been working to turn things around and it’s coming along, but there’s still a ways to go. In the meantime, I met someone and we’ve decided to move in together. What can I do to keep my bad credit score from impacting her?
Thanks,
The answer
Your consideration is duly appreciated, however, misplaced. Your credit report is linked to your social insurance number. Hence, your credit report will report information only related to you and not your partner, even if you move in together. However, if you and your partner decide to apply for any joint line of credit – mortgage, auto loan etc, then both of your credit scores will be considered. That’s when your bad credit score could hurt the odds of approval of your joint application. That’s one of the many reasons why improving your bad credit should be on the priority list.
Credit score basics
Credit scores range from 300 to 900. Equifax, one of Canada’s most widely used credit bureaus, considers credit scores between 580 and 669 to be fair. Credit scores ranging from 670 to 739 are considered good, Scores between 740 to 799 are labelled as very good and anything above 800 is excellent.
In general, negative information about your credit files stays on your report for 6 years. Negative information includes missed debt payments, dues sent to a collection agency for recovery and bankruptcies. Some information may also stay for a shorter period. Bankruptcy stays for the longest, depending on which province you’re from. In Newfoundland and Labrador, TransUnion removes a bankruptcy from your credit report 7 years after you’re discharged.
Also, note the difference between paying off debt and closing an account. You may notice that despite diligently working towards reducing your debt, your credit score is still dropping. The reason is, if you have closed certain credit accounts, your total line of credit is reduced. In turn, your credit utilization ratio increases. Credit utilization shows how much of the credit you have access to is actually being used. A higher number could hurt your credit score. Ideally, your credit utilization ratio should be below 30%. Before making any hasty decisions, it’s worth putting some thought into whether closing the account or leaving it open is best.
Assess the situation
When the financial going got tough, I reckon your credit score could have fallen below 580 as you may have struggled to keep up with payments. As you strive to turn things around, the numerical character of the credit score is a great motivator. It gives you a defined target number that you must hit, in this case, 580 and above and eventually a good credit score.
First, assess what your credit standing is and how the financial troubles have affected your credit history. Order a copy of your credit report to gauge the damage. This will help you understand what corrective steps you need to take and how long will it take to improve your bad credit score. Your credit report will note accounts that have not been serviced and indicate missed payments by a single-digit number. Accounts against which the numbers 2 to 5 appear are those where payment has been delayed by a set number of days. Those accounts with a “9” indicate bad debts.
Create a plan
Now that you have a clear picture of the situation it’s time to develop a plan. A thorough plan will include a few things. Below, I’ve outlined what they are and why they are important to implement.
Budget priorities
Create an expense priority list wherein food, medicals and other essentials are at the top, followed by debt repayments. Where possible, use cash for your purchases. Only use s credit card when you’ll be able to pay it off right away.
Debt repayment
You must develop a debt repayment plan. That brings up the question, which debts should you pay down first? There’s no one answer. It differs from person to person. A common approach is to pay off the debt with the highest interest first. That way you’ll save the most on interest.
Personally, I’d like to pay off the debt that keeps me up at night! The one that’s causing me the most distress. Once that’s out of the way, it frees up the mental capacity to deal with the other debt. Once you’re in a good mindset, you can start with the highest-interest debts or debts that are secured against assets you own.
As part of your overall debt repayment plan, start contacting some of your creditors. They are often willing to develop and settle on a payment plan. You approaching them denotes intention to pay which is what lenders like to see. This will help turn some of those accounts around in your credit report.
Payment system
Now it’s time to develop a system to pay bills on time. This is the most basic way of improving your bad credit score. Set up autopay or calendar reminders for paying your bills. The most unmissable ones! This includes credit cards and your mortgage. Missed rent and utility payments can also get in the way of achieving a good credit score.
Stop the debt cycle
If you feel you are falling behind on your payments, try to pay off at least the bare minimum. This will keep your account as a performing one. Or contact the creditor and inform them of any possible delay along with your estimated updated deadline date. Often, they will agree to a one-time exception.
As much as possible don’t get any new line of credit. Especially if you’re coming out of tough times. It’s not the most prudent financial practice to pay off a loan by taking another. Besides, considering the fact that your credit score is still sub-optimal, the terms of the new loan will be tougher and more expensive. Further, any hard inquiries can affect your credit score and can stay on your credit report for 3 years. Hence, chose the negotiation route over the refinancing one.
Credit maintenance
It is important to scrutinize your credit report frequently. If you find incorrect information in your credit report, contact the credit bureau. The reporting agency i.e. the bank/creditor and inform them of the mistake. Credit bureaus have processes in place to dispute any information you find incorrect. This exercise will help detect any fraudulent activity that may be taking place in your name.
Conclusion
By following these few steps you’ll be well on your way to getting your credit score back on track. Being back on track, you won’t need to worry about any impact on your significant other.
Thanks for submitting your question!
Consolidated Credit’s executive director, Jeff Schwartz will review it and give his response here, along with any additional tips that our credit counsellors have to offer. If you need immediate assistance, please call us and a credit counsellor will get you the help you need.
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