A Score That Truly Matters

Credit is a precious privilege that allows individuals to expand their purchasing power; yet, as an intangible, few think about it on any regular basis. Without credit, purchasers rely completely on cash flow so the ability to accumulate assets is limited to an individual’s ability to save. With credit, the ability to purchase a home or car becomes more achievable in a shorter period of time.

Whether applying for a credit card, car loan, mortgage or cell phone plan, individuals have to demonstrate their ability to make the required payments. The company issuing the credit looks to the individual’s credit score, more commonly known as credit rating, to assess the individual’s financial health. In general terms, it is through the use of credit that individuals acquire a credit score. The credit score is an overall assessment of the individual’s risk profile in terms of ability to handle credit – the probability of defaulting on a credit obligation or repaying the obligation within the terms of the obligation.

In days gone by, companies were anxious to issue credit cards to university students. This allowed young adults to easily begin developing a credit history. Today, it can be more difficult as many companies are looking for a steady income before issuing credit to young people or are requiring a co-signer who is typically a parent with a steady income stream. The challenge, of course, is that without credit it is difficult to lease a car or obtain a loan on one’s own financial strength.

For the parent, loans on which they have cosigned are often noted as an obligation on the parent’s credit history which can affect their ability to seek personal credit. It can be beneficial to both the young adult and the parent to obtain the credit card without a co-signer even if it means a smaller credit limit to begin with.

When individuals who have sufficient assets opt not to use credit because they do not need the mortgage or car loan, they can be limiting their ability to demonstrate credit worthiness. Similarly, when a couple opt to put credit in one person’s name, the other person is not building a credit history. So, whether or not the credit is truly needed, it can be helpful to have a credit card to help build and maintain a record of credit worthiness.

Maintaining a strong credit score helps ensure access to credit. Each provider of credit typically reports information about an individual’s credit history to credit-reporting agencies, such as Equifax Canada and TransUnion Canada, who gather the information and maintain a credit profile on every individual. To maintain a good credit rating:

• Use credit cards wisely. Paying the full credit card balance on a monthly basis will be viewed very positively in the credit assessment and, in doing so, it is likely that the individual is living within his or her financial means. At minimum, it is essential to make the minimum payment outlined on the monthly statement, in order to avoid a negative adjustment.
• Pay monthly cell phone bills on time.
• In some cases, applying for several sources of credit in a short period of time can be viewed negatively. By carefully considering the rationale for the credit application, individuals are in a better position to anticipate possible options and can help minimize negative responses.
• Recently, there have been stories in the media about some cities sending outstanding parking tickets to a collection agency. This type of action against an individual can be a negative that could send the wrong message to a potential creditor.
• When the loss of a job impedes an individual’s ability to meet the monthly mortgage or other payment, it is important to discuss this with the lender in an effort to ascertain interim options. Credit providers are typically more open to a dialogue rather than surprises.

Individuals can request a copy of their credit report, either via regular mail or the internet. The cost varies depending upon the information being requested, but there should be the option to request this information once a year at no cost. Identification acceptable to the rating agency will be required. If mistakes are found, it is important to correct the error. Reviewing one’s personal credit score is worth the time and effort as it helps to keep the information current and correct. It can also help uncover the possibility of identity theft.

Although an intangible, one’s credit score is a direct reflection of personal financial health that will influence the ability to acquire credit. It is a score that can truly make a difference.

Here are a pair of links to learning more on how to request a credit report:

http://www.equifax.com/ecm/canada/EFXCreditReportRequestForm.pdf

http://www.transunion.ca/ca/personal/creditreport/consumerdisclosure_en.page

E.O. & E.

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This commentary is published by the Institute in consultation with an editorial board comprised of recognized authorities in the fields of law, life insurance and estate administration.

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Contributors to this edition:

James W. Kraft, cpa, ca, mtax, tep, cfp, clu, ch.f.c.
Deborah Kraft, mtax, tep, cfp, clu, ch.f.c.