- Hey, welcome back.
It's Nolan Matthias,
and today I wanna give you the definitive guide
on how to manage your credit in Canada,
because you know what, I've been watching the YouTubes,
and there's a lot of really crappy information out there.
So I wanna give you the realities, the hard truths
of how to manage your credit, what works, what doesn't,
from somebody who's been in the industry for 18 years now
and actually understands how credit bureaus work.
But before we get into it, do you me that favor,
hit that Subscribe button, hit that notification bell,
and please hit the like button so more people like you
can see that this video,
this one is an important one.
And as always, make sure you leave your questions
and comments about credit in the comments section below,
I'll get to them as soon as you send them.
Okay, so let's talk credit bureaus,
because this is a topic that is widely misunderstood.
We've seen all sorts of bad advice
on this topic over the years.
And I wanna set the record straight
on a whole bunch of things,
and talk about what really matters in your credit score.
And I wanna start with two fallacies that I see consistently
on the internet right now, especially on YouTube.
And they are one, that applying for credit cards
and credit card hacking so that you can get rewards
is a good idea, because it's not.
And two, that you should be using free credit score apps
in order to monitor your credit.
And this is a really bad idea, and I'll tell you why,
but first let's talk about that first piece,
which is credit hacking.
Credit hacking is one of the things
that can handedly reduce your credit the quickest,
because quite frankly,
there are two things wrong with credit hacking.
One is it requires you to be consistently applying
for credit, which does have an adverse effect
on your credit, we'll get to that little bit later
on in the video.
And two is, the more credit you have,
the more inclined you are to use it,
which leads a lot of people who get into credit hacking
for things like free rewards,
into a lot of financial trouble down the road.
And we've seen this consistently with clients
throughout the years where somebody comes in
and basically has to either refinance or doesn't qualify
for a mortgage because they've taken somebody's advice
on how to get free things by using credit cards.
Let's call a spade a spade right now.
If somebody is offering you something for free,
whether it is your credit score or whether it is flights
or whether it is some sort of reward,
there's a reason they're doing it,
and it's because they know that if they do,
statistically you are going to end up spending money
with them, or in the case of credit cards,
you're going to borrow money from them.
And that's not just true for credit card rewards programs,
it's also true for these companies
that offer free credit score monitoring
and free identity theft monitoring.
These companies are doing that for a reason.
And the reason why is because they are using the fact
that you're getting your credit score monitored by them
in order to get you to eventually apply for credit cards
with them or loans with them or mortgages with them.
Your free credit score is an avenue
for them to sell you debt.
So stay away from those sorts of companies.
So how do you really monitor your credit score?
Well, the best way to monitor your credit score
is to go to a place like Equifax.ca or Transunion.ca
and pay to get your credit score directly from them.
And both of these companies have credit monitoring products,
you just have to pay for them rather than get them for free.
But remember, it's just like Facebook,
if something's free, if you're able to use it for free,
it isn't the product you are,
and that's what these companies
that are giving you free credit reports
and free credit score monitoring are doing,
is they're using you as the product
so that they can sell you credit cards
and loans and stuff down the road, stay away from those.
So once you've done to Equifax.ca,
once you've gone to TransUnion
and you have figured out what your credit score is,
and they've told you all the things you can do
to improve your credit, well,
that's when it is time to take action.
Now, keep in mind that Equifax, TransUnion,
they're going to have different ways
of calculating your scores.
In fact, each of those companies has different ways
of calculating score depending on who's asking for it.
So the score that you see is often gonna be
a different score than what the credit card company sees
or what your mortgage broker sees or what your bank sees.
And the reason for this
is they just have different algorithms that they use,
and different people, different companies subscribe
to different versions of the algorithm.
For us, we subscribe to what's called beacon nine,
so we see a beacon score,
it is the latest version of a beacon score,
and it has a higher emphasis on certain things
than it has on other things.
And I'll get into that in a second here,
when I start talking about
what actually affects your credit.
So what does affect your credit?
Well, there's five specific areas
that credit bureaus look at
in order to establish your credit.
They are, your payment history,
your used versus available credit, your credit history,
your public record and your actual credit inquiries.
And we'll go through each one of these in detail.
So let's start with payment history.
Payment history makes up 35% of your credit score,
and what payment history is, is exactly what it sounds like.
It is your history of actually making your payments.
So if you're new to credit,
generally your payment history is very good,
because chances are you haven't missed a payment yet.
However, if you do eventually miss a payment,
that miss payment will be on your credit bureau
for at least seven years.
Now, there's different degrees of miss payments.
There's missed by 30 days, missed by 60 days, missed by 90,
180 and so on and so forth.
And typically how this is categorized
is as an I1, or an R1 or an I2 or an R2.
I1, I2, I3, I4, that refers to installment payments.
R1, R2, R3, R4 refers to revolving credit.
And installment payments are exactly what they sound like.
That's when you have something like a car loan
and you have an installment payment
that you pay every single month until it's paid off.
And revolving payments are things like credit cards
and lines of credit, where your credit fluctuates
as you borrow more and pay it off,
and you obviously have the option to pay more down
as time goes on and draw more down as time goes on.
So an I1 an R1 means that your payment
has been made on time.
If you go to I2 or R2,
it means that you've missed a payment by at least 30 days.
Now, a lot of people believe that if you miss a payment
by one or two days, that that's a missed payment,
and that hurts your credit, that's not actually true.
You actually have a 30 day grace period
to make your payments before it starts
to affect your credit.
So if you see somebody who has an R2 or an I2
or if you yourself have an I2 or R2,
it means that you've missed a payment by more than 30 days.
So you didn't just miss it on the due date,
but you missed it by a whole month after the due date,
and that is when your credit starts to get hurt.
And those R2s, R3s, R4s,
those will last on your credit bureau
for at least seven years.
The only way to get rid of a miss payment
on your credit bureau is to wait,
and it takes basically seven years.
So time is the only cure for miss payments
on a credit bureau.
And late payments have the biggest negative effect
on your credit score because late payments
are the thing that indicates to somebody
who's about to give you credit that you aren't reliable.
So the number one thing you can do
to keep your credit score high is to make sure
that your payments always get made on time,
bar none if there's anything
that you take away from this video,
it is this, make your payments on time
and your credit will always be reasonably good.
As soon as you miss a payment, that's when you're starting
to get yourself in credit trouble.
Now, if you get to an R6,
which is basically 180 days late,
that is basically when lenders will start
to sell your loans to collection agencies,
they will basically write it off on their books,
and that's when you'll start getting calls from
the collectors that nobody likes to get calls from.
And here's the thing about that is,
once it goes to a collection agency,
it's pretty much considered an R9,
which is the worst score you can get
for a payment of any sort,
and that basically means that you have failed to pay it,
and the bank has said, "Hey, we're done with him."
And then you end up with this thing
that additionally hurts your credit,
which is the collection,
because collection show on your credit bureau as well.
And those have a significantly bad impact as well.
Now, the types of things that we typically see
on a credit bureau that do a ton of damage
to somebody's credit are collections
from two types of organizations.
One, is cell phone companies, and two is ambulances.
So if you get into a feud with a cell phone company
about whether or not they overcharged you,
the best course of action is not to say,
"I'm not going to pay you."
The best course of action is to pay them
and then continue to fight them after you paid them,
because telephone companies will damage your credit,
they have no hesitation in doing so,
and it is the number one way that we see people
get their credit score, absolutely screwed.
And the big thing you need to understand
about collections as well is,
you're probably not getting a credit card
or a loan until that collection is shown as paid.
So the collections agencies know that the chances
of you being able to get something like a mortgage
are slim to none until you make right on that credit.
So they will get their money money eventually,
so it is best to pay them and then fight them
after you paid them so that they don't damage your credit.
And by the way, Equifax, TransUnion,
you can go to them and say, this isn't fair all you want,
but there's a really good chance
that if the credit card company, the telephone company,
whoever it is, and the collection agency
that can show that they've tried to get you
to make the payments and you haven't done so,
there's a really good chance that Equifax and TransUnion
are going to do absolutely nothing to help you.
So again, make your payments
whether you think they're fair or not,
make the payments, make the payments, make the payments.
Now, the second thing that affects your credit
is your use versus available credit ratio.
And this accounts for 30% of your credit score.
And in recent years, this has been one
that we've seen do a ton of damage to people unexpectedly
because it used to be not as big of a factor, but now it is.
And what your used versus available credit ratio shows
is your utilization.
So if you've got, let's say, a $10,000 line of credit,
and you're constantly using $10,000 of it,
well, what that tells the credit bureau agencies
is that there's a good chance,
you are going to run out of your ability
to make your payments because you're using so much credit.
So what they wanna see
is they wanna see low credit utilization.
If you've got 10, 15, $20,000 available to you in credit,
they wanna see you use 1000 or 2000 or $5,000,
not the entirety of your credit that's available to you,
because what they say is that the number one indicator
of whether or not somebody is going to get
into financial trouble
is the amount of credit that they've started to use.
And obviously in Canada, this has been a huge discussion
over the last several years, where Canadian debt ratios
are so high, and as a result,
Equifax and TransUnion recognize this,
and now they're giving that a higher factor
in credit score algorithms to make sure
that it's accounted for in somebody's risk profile.
Now, this is a number that you can gain.
So the fastest way to increase your credit score
is to play around with this credit utilization number.
And the way that you do it is by making sure
that you have less credit utilized.
So ways you can do that is by paying down
your existing credit or applying carefully for new credit.
So basically, the first strategy is to pay down
as much credit as you can.
And within 30 to 60 days once you've paid down credit cards
and lines of credit that you've utilized to a high extent,
well, then your credit will start to increase.
Now, the other way, again, is to apply for new credit.
We typically don't wanna see people apply for new credit
unless they absolutely need it.
But this is one way to kind of game the system.
If you apply for a new credit card, a new loan,
a new line of credit,
that will increase your available credit.
And ultimately, if you aren't using it,
will help increase your credit score.
Now, the thing you need to watch out for is,
if you're at high utilization rates
and you start applying for more credit,
well, what that tells the credit agency
is that you're in trouble and you need more credit,
and that will actually do more damage
to your score than good.
So that first strategy
of paying down your credit always works.
The second strategy of applying for more credit
to get that utilization ratio changed up a little bit.
That one can be dangerous
and doesn't necessarily work all the time.
In fact, it can do more harm than good.
But, let's say you get something like a preapproval letter
for a free credit card
where they say no credit checks required,
or you get the ability to get a free credit card
or a free line of credit with a mortgage or bank account,
well, it's always a good idea to accept those offers
as long as there's no fees associated with them,
because that will increase your available credit
and will ultimately increase your credit score.
As long as you don't actually end up
using those credit cards or lines of credit
that they've been offered.
And the third factor that goes into your credit score
is your credit history.
And this is basically how long your credit
has been established.
Now, a lot of the times we see people
upgrading credit cards, getting new credit cards,
and they have this old MasterCard or this old visa
or something that they haven't used in 15, 20 years,
and they go, you know, I haven't used it,
because I've got a better Aeroplan card now
or I've got a better card that gives me a better reward,
so I'm gonna shut down that original credit card.
That's a bad idea.
What you wanna do, is you wanna try to maintain
your longest standing credit facilities.
And what I mean by that is,
if you get a credit card that you opened up
when you're 18 years old,
and you've held onto it for the last 20 years,
well, that 20 year timeframe adds to your credit history
and that helps increase your credit score.
Now, the fourth thing, and this makes up about 10%
of your credit score is public records.
Now these are things like collections and bankruptcies.
Now, public records make up about 10%,
but don't let that fool you, because if you've gotten
to the point where you've got a public record
or a collection, there's a really good chance,
there's a lot of other stuff on your credit
that's gone really bad.
You've missed payments, you've got high utilization,
And at this point, your credit is really bad,
and it's probably gonna be
a seven to 10 year rebuilding process for you.
So the key here is to make sure that there's never
a public record filed on your credit.
If you get a call from a collection agency,
if you know you're getting behind on your bills,
do everything you can to make sure
that you don't have to declare bankruptcy,
that you don't have a collection.
And buy by the way, consumer proposals.
Consumer proposal agencies will tell you
that this is better than a bankruptcy,
it won't affect your mortgage,
it doesn't affect your credit as much.
It does, it makes it as equally as hard to get credit
as a bankruptcy does, they aren't good things,
they do not help you, there are better options.
If you can avoid a consumer proposal,
do so at all costs, avoid these like the plague,
they're not a good thing, no matter
what the consumer proposal company tries to tell you.
If you have to, if you absolutely absolutely have to,
fine, do it, but don't think that
just because you get a month or two behind on your payment,
and things are a little bit tough, that this is a good idea,
because there's a really good chance that it's not.
And the fifth thing that affects your credit,
and this is probably the most misunderstood
of the five, is inquiries.
And this makes up about another 10% of your credit score.
And this is the reason why we were so adamantly opposed
to credit card hacking, is because,
inquiries can hurt your credit
and they can affect it quite negatively.
And we have seen people on many occasions
who have made every single payment,
who have low credit utilization
but have a ton of credit cards
and a lot of inquiries because they've done something
like credit hacking, or people who like to go
and shop for cars and go in every single month
and let the let the dealerships run their credit.
These types of activities
definitely do damage to your credit.
It doesn't matter what the experts on YouTube tell you,
applying for credit when you don't need it
is a bad idea unless you have no credit at all.
Now, that's not to say that when you do need credit
that you shouldn't go and shop for credit,
because one of the things that we often see
with clients is, they feel like if they apply with us
and then they apply with their bank,
and then they apply with another broker,
that's going to do damage to their credit,
well, it won't, because credit bureaus
and the algorithms are smart.
What they realize is that when people go to apply for credit
that they should have the right to shop, and that they will.
So typically if you're going and looking for a mortgage,
and you apply it several different places
that have mortgage credit bureau pole codes.
Well, those poles will all be counted
as one rather than as four or five.
So you do have the right to shop,
and shopping with multiple places
will not affect your credit in a super negative way.
You know, what will is if you apply
for a mortgage every month for 12 to 15 months in a row,
but if you're applying once
and then maybe doing a recheck four months down the road
to actually get the mortgage,
when you go to purchase a property,
that stuff won't hurt you.
It's when you apply over and over and over again
for doing things like credit card hacking that you get hurt.
The other thing to note is that there are things
like soft and hard hits.
When you go and ask for your credit for the companies
that do the free credit score monitoring stuff,
when you ask for it from Equifax or TransUnion,
or when your bank does a soft hit to see
if you're still worthy of credit from them
and to maybe make you offers in the future,
those things won't affect your credit.
What will affect your credit is when you apply for credit,
when you apply for loans, when you apply for mortgages,
when you apply for lines of credit or credit cards,
those things will affect your credit.
However, a single inquiry isn't going to hurt you enough
to drop your credit score from 750 down to 620,
it might drop it a point or two.
Now, let's talk real quickly about credit scores,
because there's a lot of misinformation around this as well.
What constitutes a good credit score in Canada?
Well, anything over 680 is considered good,
and that will pretty much get you the best rates,
the best options, the best debt servicing ratios
across the board.
So if you've got over 680 beacon score,
you're probably going to be okay.
Between 620 and 680, that's where things get
a little bit iffy,
you may not be able to qualify for as well much.
Will you pay a higher interest rate?
Probably not, mostly companies don't charge
a higher interest rate between 620 and 680,
but it's a possibility.
Now, under 620, this is where you start to get into issues,
this is where it starts to become hard to get a loan.
And because it's hard to get a loan, the price goes up,
that's where you start getting charged
a higher interest rate.
If you're between 550 and 620,
can you improve your credit score
and get it back up into that 650 to 700 range?
Yes, it's definitely possible.
Once you get below 550,
you've probably got a lot of work to do.
And it's probably going to be a matter
of making sure going forward
that you always make your payments on time,
and making sure that you do so for at least
a seven to 10 year period,
because once you're under that 550 beacon score,
it's probably gonna take a lot of time
and a lot of effort to get your credit score
back to where it needs to be.
So around this whole thing out, what are the things
you can do to make sure your credit stays good?
Well, first of all, avoid miss payments,
avoid consumer proposals, avoid collections,
avoid bankruptcies, basically avoid anything
that has to do with missing a payment.
The second thing is make sure
you keep your utilization rates low.
So borrow far less than what you have available to you.
The third thing is don't shut down those old credit cards,
they are helping you.
By the way, don't shut down any old credit cards
or any lines of credit, because the longer you have them,
the more available credit that means you have,
and the better your credit score will be.
And the fourth is,
don't apply for credit that you don't need.
If you've got a good credit score,
if you've got all the credit that you need,
don't apply for more, there's no point.
Now, if you've got under $2,000 in credit cards
available to you,
and you've had less than two years history on them,
does it make sense to maybe apply for another one
and get a little bit more available to you?
Absolutely, but outside of that,
there's really no reason to apply for a loan
that you don't need or a credit card that you don't need.
And sure as hell, don't do credit card hacking,
that's just silly.
So if you found this video useful,
if you found it interesting,
if you found you learned a whole bunch
about credit that you didn't know, do me that favor,
hit that Subscribe button, hit that notification bell,
and please hit that Like button so more people like you
can see this video.
This is definitely an important one.
And please, please, please do me that other favor,
comment in the comment section below,
ask me your credit questions,
leave me your credit comments,
and we'll see you on the very next video.
Cheers.