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The Mystery of Credit History: How does your credit affect your financial wellbeing?

By Anil Rege

July 5 2021 - Having great credit is an important part of our financial ecosystem, especially in credit-based economies such as Canada, the US and most of the developed world. Your credit is determined as a score, which is a three-digit number assigned to you by credit rating agencies like Equifax & Transunion (in Canada). The credit score is based on five main factors; Payment History, Credit Utilization, Credit History, Credit Mix and Credit Inquiries. Your credit history influences around 15% of your overall score and that is what we will delve into in this article.

What is credit history?

Your credit history is a part of your credit file and is made up of facts gathered from credit card providers, financial institutions, retailers and other lenders. It details how long your various credit accounts have been in existence. Credit history is a record of a consumer's ability to repay debts and demonstrated responsibility in repaying debts.

How does your credit history influence your credit score?

The credit score calculation typically includes both how long your oldest and most recent accounts have been open as well as the average age of your accounts. In general, creditors like to see that you've been able to properly handle credit accounts over a period of time. The longer and better you have handled credit, the higher your credit score. It gives a lender the confidence that if you have handled your credit well for a long time, then you will be better able to pay them back on time. Therefore, they will be more likely to be open to offering you a higher credit limit.

What factors affect your credit history?

Creditors look at many aspects of your credit history to determine your credit worthiness such as the following:

  • Recent Activity - It is a good idea to apply for a credit card or other credit products to build your credit history. But try not to make too many credit applications in a short amount of time. It signals to lenders that you may be overstretching yourself, which may affect your ability to repay. When you are starting out, it is advisable to have more than one credit card as this increases the overall credit limit you have.

  • Length of time that credit accounts are open and active - It is a good idea to keep your older credit cards active, even if you do not use them regularly. Closing a credit card account you've had for a long time may decrease the average age of accounts on your credit history, which could negatively affect your credit scores. In general, creditors like to see you've been able to properly handle credit accounts over a period of time. Often, you may have a credit card that you have not used for a while.

    Your lender may send you a notice to either use the card or they would close it. At this time, it would be better to make a small purchase on that card to keep it active, especially if it is a card that you have had for a long time. Most credit cards only require you to make one purchase in a year to keep the card active. Ensure you ask your credit provider for these details when you decide to stop using a particular card.

  • Patterns and regularity of payments over a period of time - To help build your credit history, try to keep making regular payments (including interest, if applicable) rather than paying off all debts in one go. This helps establish a positive payment pattern which helps improve your credit score. If you have a student loan, it can be beneficial to keep paying if off over time rather than all at once (or in large chunks, when you get a job). Since student loans are typically offered at a low-interest rate and are reported to the credit bureaus, it is better to use your money to pay off higher-interest debt.

How to establish credit when you don't have a credit history

For many Canadians like students or new immigrants, establishing a credit history is an essential way for achieving their financial wellbeing.

  • Consider a secured credit card or a student credit card - A secured credit card requires you to make a deposit upfront, possibly the same amount as your credit limit. You can use secured credit cards just like an unsecured credit card ' to make purchases, make regular payments and improve your credit score.

  • Consider becoming an authorized user on a credit card - Get an add-on card so you are an authorized user on someone else's credit card account. You get a credit card in your name, linked to the primary account owner's credit card account.

  • Use a co-signer. A co-signer is someone who agrees to be legally responsible to pay a debt if you, as the borrower does not pay back a loan as agreed. You can ask your parents to co-sign on a car or student loan. Please get into this scenario knowing the credit risks to you and your co-signer.

Remember, establishing a credit history takes time, so don't expect things to change dramatically overnight. But month by month, responsible credit habits will translate into better credit and will go a long way in building a strong financial base for your future.

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Anil Rege, Lecturer at Toronto School of Management (TSoM)

Anil Rege is the CMO of Plastk Financial- a new Canadian Fintech start-up. He is a dynamic, innovative and trusted Fortune 500 marketing and business leader. He has extensive North American and Global experience at Tier 1 companies like Nestle, Reckitt Benckiser and Procter & Gamble. As an industry leader he & Plastk Financial have made a Canadian Financial Education Leadership (CFEL) commitment. This article is a part of that commitment.


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