Q: I've had trouble finding steady work these last few years and my credit rating went down because of all my late and missed payments. Things are better now, so I'd like to build a good credit rating again but don't know where to start.
How many credit cards and how much debt do I need to build a good credit rating?
A: Building a good rating takes time. Your activities need to show that you make responsible choices with your income.
This means you consistently make payments on time, you don't borrow more than you can afford to repay and you use your available credit wisely.
When you apply for credit, lenders look at the whole picture to see if you've got balance. You need some money saved, not too much debt and enough stable income to meet all of your obligations.
Lenders and the credit-reporting system know that a person has only a set amount of money available each month to make debt payments.
Too much debt will be a concern when you apply for credit and it will work against building a good credit rating. Here are some things you can do that will help you build a good credit rating while staying out of debt: ·
- Only apply for credit that you need. The number of inquiries on your credit file reflects how often you seek additional credit. There are only so many payments someone can afford to make.
- The type of credit you have impacts your credit rating. Repeated consolidation loans and deferred payment plans can indicate that you have trouble meeting all of your obligations.
- Keep your credit limits reasonable and keep all balances owing well below the limit at all times.
- Use your bank account properly and conduct routine banking transactions each month. Overdrafts and bounced payments can signal financial difficulty.
- Pay parking tickets and driving fines promptly.
- If you have a cellphone on contract, be sure to pay the full balance owing each month. Most important, have a realistic budget that lets you live within your means.
- One, maybe two credit cards with reasonable limits based on your income, are all you should need. Pay them off in full every month.
- Excluding your mortgage or rent payment, try not to use more than 20 per cent of your take-home pay for monthly debt payments. This will let you manage unforeseen financial challenges effectively and take advantage of unexpected opportunities.
Scott Hannah is president and CEO of the Credit Counselling Society, a nonprofit organization. For more information about managing your money check nomoredebts.org or call 604-527-8999.
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