Understanding Credit

Using Credit

Whether financing a home, car or an education, one wishes to make an educated credit decision and steer clear of moves that end up doing more harm than good.

In most cases, to borrow money for the best available terms, one needs to have good credit. Good credit means establishing a history that shows you have fulfilled agreements between you and your current and previous creditors/debtors. Let’s continue learning about credit.

Establishing Credit

Establishing credit is an important first step when one wishes to finance things like a house, vehicle or education. When initially establishing credit, you should first ask yourself, “Can I afford to make this payment and am I willing to make payments for the full term?” Establishing good credit history makes obtaining financing at lower interest rates and better terms easier. Some simple ways to establish credit are:

  • Start a savings or chequing account at your local bank
  • Apply for a retail or bank credit card (or consider a secured credit card)

Maintaining Credit

Now that you have established credit, it is important to build a favorable credit rating. Here are some ways to build and maintain good credit:

  • Pay on time
  • Do not go over your credit limit
  • Pay at least the minimum amount due – and more if possible
  • Avoid impulse spending
  • Notify creditors of address changes
  • Contact your creditors to work out a solution if you are to have problems making your payments on time

Understanding Credit Reports

Your credit report will illustrate to new potential lenders, how you manage your credit and lists what type of credit you have been applying and whether or not you have begun an account with any lenders, the length of time your accounts have been open, and whether or not you have paid your bills on time.

Potential creditors such as banks, automobile finance companies and credit card companies review your credit report to evaluate the potential risk of failure to repay the credit. Credit scores help lenders determine who qualifies for a loan and at what interest rate/terms.

A credit score is a number that summarizes your risk level. Some factors that may make up your credit score and determine your access to credit are:

  • Payment History
  • Amount of Debt
  • Length of Credit
  • New Debt
  • Type of Credit

Typically, detrimental items to your credit stay on your credit report for 6 years, impending on which credit agency is being used to check your credit profile. You should check your credit report at least once a year. When you do, make sure all information is accurate.

When creditors review your credit report, they want to know you will keep your promise to repay the loan.