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A credit card is a way to borrow money, but it is easy to forget that you need to pay that money back! A credit card does not increase the amount of money you have available. In fact, it will most likely decrease the amount of money you have available if you don’t pay your full balance off each month. This is because you will accrue interest on the borrowed money, usually at a higher interest rate than other types of loans. Your credit card payment spending should be included in your household budget to make sure you are paying it off as soon as possible. If you don’t keep an eye on your credit card spending, you will end up building up debt, paying interest on that debt, and eventually hurting your credit score due to your credit utilization and potentially missed payments if the amount becomes too much of a burden for you to handle.
The balance of a credit card is the amount you have spent but have not paid off. If you have a $500 credit card and have spent $300 on it, and have not made any payments toward that amount, your balance will be $300. It is important to pay it off before the due date because that is when the interest starts adding to the balance, and in turn, increasing the amount you owe each month until it is paid. If you are unable to pay off the full balance monthly, this means that everything you have purchased with the card costs more than the original price because it now has interest added to that price, often times at 20% or higher annually. What this means is if you have a $1000 balance in January and only make the minimum payment for the duration of that year, that original $1000 is now over $1200 after a year of interest. To make things worse, you are not just paying the interest on the original $1000, you are now paying interest on the interest! If we don’t pay any of that loan for another year, after two full years of having a $1000 balance, the true amount owing will exceed $1440 ($200 interest for the first year, then $240 interest on the second year due to being charged interest on the interest. This interest is based on an annual percentage rate (APR) but is calculated monthly.)
Paying your full balance off each month will not only save you a significant amount of money in interest, but it also shows lenders that you are in control of your finances and are a responsible borrower.
Sometimes it is just not possible to pay your balance off in full, but it is extremely important that you make at least the minimum payment dictated by the credit card provider. Missing the minimum payment will result in some or all of the following:
It is very important to check your credit card statement to make sure there are no errors. Someone might have entered the wrong number into the machine when you were paying, maybe you were charged twice, or maybe you did not purchase something on your statement. In the event you do discover an error, report it immediately by contacting your lender or card provider.
Your card number, PIN (Personal Identification Number), CVV (Card security code on the back of the card) and your password for online transactions are all meant for just you to know. Anyone else possessing this information leads to the risk of theft. If you share your PIN or security code, you may be held responsible for transactions you see as unauthorized.
If any of the situations below apply to you, these are indicators that you may be living beyond your financial means:
If you find yourself in any of the situations above, you can do the following:
There are other ways to borrow money that cost less interest. If you are having trouble paying down your debt you can look at a personal line of credit, which should have a much lower interest rate than your standard credit card. There are also low-rate option credit cards where interest rates are in the low teens rather than the high teens or low 20’s for interest rate percent. Credit cards that offer rewards are great, but only if you are not carrying a balance. A low-rate option card will not have rewards, but the money you will save in interest if you are carrying a balance will save you much more then you will earn from rewards. A good rule of thumb is if you keep a balance, try to switch to a low-rate card. If you can pay the balance off in full each month, then you’re not paying interest, meaning you can take advantage of the rewards card.
Making your payments is the single most important factor that makes up your credit score. If you can stay on top of your payments, the rest should fall into place.
It is especially important to use your credit responsibly and not overextend yourself. Whatever the limit is on an account, that is the limit you and the lender agreed on, and it should not be exceeded. If you do end up going above this limit, it will immediately, and negatively, affect your credit score. The exact percentage that lenders like to see a consumer using varies, but the range is between 35% and 65% of your total limit. For example
The reason lenders prefer to see you under these thresholds is because if you use most or all of your available credit, you’re seen as a greater risk, even if you pay your balance in full before the due date. What this shows the lender is that you do not have a good enough handle on your finances and that you need to overextend yourself.
You can calculate your credit usage rate very easily to make sure you are under these limits on each individual card as well as all combined:
In this case we are a little above the low end of where lenders would like to see your credit utilization, but not above the high end, so you wouldn’t be considered overly risky to the lender based on credit utilization. Lenders will look at the type of loan as well to determine whether it should have a high amount or not. Being near the credit limit on a credit card is not the same as being near the credit limit on an auto loan, because these are different types of loans. A credit card is “revolving” payment, where as an auto loan is an “installment” payment. Installment loans have a set starting amount and a specific amount of payments until the loan is paid in full. A revolving account, like a credit card or line of credit, allow you to control how much is owing each month. If you owe more, the minimum payment will increase, so it is especially important to make sure you are paying at least the new minimum amount each month.
The longer one of your accounts is open, the better it will impact your score. There is a big difference in the lenders eyes when they look at a tradeline that is under one year old versus looking at one that has been around for much longer. It is much easier to determine whether the lender can trust that they will be paid back if there is evidence the customer has not missed a payment in years compared to only a few months.
Account transfers will affect your credit because you are closing one loan in order to open a different one with different terms, like lower fees or a lower interest rate. What this does is closes the existing account and starts a fresh tradeline, possibly lowering your credit score depending on what other existing credit you have.
If you have old credit and are thinking about closing the account, you may want to consider keeping it open in order to keep the age of your accounts high, keeping your score higher at the same time.
Lenders expect you to apply for credit from time to time. This is a necessary part of how the system works. When a lender views your credit report, this is called an “inquiry”. This is the same thing as a “credit check”, and each time credit is pulled, you are deducted points from your credit score.
Additionally, when there are too many credit checks in your credit report, lenders tend to think you are either urgently seeking credit, or trying to live beyond your means, which are both negatives in the lender’s eyes.
Controlling the number of credit checks:
The good news is that you are in control of the amount of credit checks that appear on your credit bureau. You can achieve this by limiting the number of times you apply for credit. Only apply for credit when you only really need it, and when you do apply, make sure that you apply everywhere that you intend to within a 2-week period when shopping around. This will be recognized as a “buying cycle” and will be combined and treated as a single inquiry for your credit score.
The difference between a “Hard Pull” and a “Soft Pull”:
A “hard pull” is a credit check that will appear in your report, as well as deduct from your score. Anyone who looks at your credit report will be able to see where you have applied within the last couple years. The types of applications that would count as a hard pull are:
“Soft pulls” are a credit check that appear in your report, but only you are able to see them. They also have no effect on your credit score. The type of credit checks that will have a soft pull are:
Not all credit is the same. If you only have one type of credit, like a credit card for instance, this means you only have a revolving type of loan. Lenders prefer to see a variety of types of credit as it tells a better story of what type of customer you are. There is a very large difference between having a $500 credit card that the minimum payment is $10 a month, or committing to a new car loan, which might be $400 a month. It is hard for a lender to agree to loan you a substantial amount of money if the only history is you having to make a $10 payment. Additionally, having a history of installment payments will show the lender that you are able to make the same payment, on time, each month, further allowing them the confidence that you will pay the debt, and allow them to lend you the money in the first place.
O’Brians Automotive has been helping people repair their credit for over a decade, so we thought we’d put some information together so that you know exactly what a credit bureau is and the importance it holds. Below we break down every aspect of your credit report and go into detail about what appears on it, and just what that tells the people on the other side who are looking at it to determine whether they want to lend you money or not.
A credit report is the summary of your credit history. It will list all the recent times you’ve applied for loans, any loans you have currently or that have been closed and the details regarding your payment history on these loans. It also tracks if you have any judgments or collections and whether they are still outstanding or have been paid.
Your credit score is a number ranging from 300 to 900. This number is calculated using a formula and is used as a guideline for the condition of your credit, but is not the only factor in what lenders use to determine whether they are going to offer an approval for you. Your score will fluctuate month to month depending on what type of activity there has been. If you make all your payments on time, and nothing negative like a judgment, collection, or late/missed payment, then your score will stay the same or increase. If you have missed payments or have collections and judgments appear on the report, you can expect your score to decrease.
Your credit score is based on a number of factors, but overall, it is calculated to determine risk. It is unknown exactly how much weight is behind each of the factors below, but we do know they are factors in how lenders decide whether to approve you or not based on how much risk they perceive. Afterall, the lender is borrowing you their money, so it’s reasonable that they put these checks and balances in place in order to ensure they receive their lent money back.
Factors that can affect your score:
Another factor to note is that not only is their multiple Credit Bureaus in Canada (Equifax, TransUnion) which will produce different results, but once a lender sees these scores, they use their own proprietary internal scoring systems to determine whether the customer should be approved for a loan. This is done by taking the information provided by the Credit Bureaus and then running it through their own system based on what the client is trying to get approved for. Sometimes these internal checks see something negative that the Credit Bureau didn’t, and unfortunately the lenders aren’t able to offer any approvals.
In Canada, there are two main Credit Bureaus: Equifax and TransUnion. These are private companies that collect the information, store it, and then charge companies to share this information with them. They only collect information from lenders about your financial history in Canada.
Don’t worry! Not everyone has access to this sensitive information. Those who can see your credit report in order to help them make decisions about what you are requesting include:
Having access to your Credit Report allows them to determine whether they will:
When someone ask you for permission to “check your credit” or “pull a report”, they are asking for your consent to access your Credit Report. This will result in an inquiry being documented on your credit report. If a lender sees too many inquiries on your credit report, it can lead them to believe you are either urgently seeking credit, which can seem suspicious for a number of reasons, or that you are trying to live beyond your means.
Generally, permission is required in order to access this sensitive information. Most provinces require written consent to check your credit report, however in Saskatchewan, Nova Scotia, and Prince Edward Island, a business or individual only needs to inform you they are checking your credit report. Your consent allows the lender to view your report when you first apply, but also allows them to access it anytime afterward while your account is still open. Your consent also allows the lender to share new information about you with Equifax and TransUnion. This will only occur if you have been approved. Lastly, some provincial laws will allow government representatives like judges and police to access parts of your credit bureau without your consent.
Credit reports contain personal, financial, and credit history. This information is usually updated every 30 to 90 days.
Personal Information
Your credit report will usually contain:
Financial Information
Your credit report will usually contain:
It will also contain detailed information about your trade lines such as:
It can affect your finances, which will affect your future. Financial institutions look at your credit report to determine whether or not they are willing to lend you money. They also use them to determine what interest rate they are willing to lend this money. As a general rule, the better your credit, the lower your rate. This is because you have less perceived risk of defaulting on the loan if you have a solid history of making smart financial decisions that the lender can access. If you have some hiccups on your credit report, it could be hard for you to get even a $500 credit card, let alone a larger loan or mortgage. It can also affect your ability to rent a property or be hired for a job. Don’t worry though, repairing mistakes in the past is possible, and O’Brians Automotive is here to help with our knowledgeable Sales and Finance teams that have been helping our client base rebuild their credit for over a decade.
When the Covid-19 Pandemic first hit, many Canadian’s were hesitant to pursue credit. Now that we have all began to adapt to the changes, more and more people are now looking to return to some sort of normalcy, and that includes making large purchases that many cannot afford to buy outright. Due to this, many Canadian’s are pursuing alternative lending methods in order to get the automobile they need.
People with credit hiccups in their past, or low income by the lender’s guidelines are known as “sub-prime” or “credit constrained” customers. These customers rely heavily on these alternative lending solutions, loans from non-banks or non-traditional lenders.
In exchange for offering approvals to clients who are considered to carry a greater risk of defaulting on their loan, these lenders collect higher than typical interest rates and sometimes add fees that other lenders might not. These can be higher than usual NSF fees, missed payment penalty fees, collection fees, and loan closing or origination fees, sometimes known as the document fee. These fees are legal, and part of the loan contract that you are agreeing to when you sign and are usually there as added incentive to make your payments on time.
We want to make sure our customers are aware of these differences because the alternative lending market in Canada is less directly regulated and can expose customers to greater risk if they are not aware.
According to LoansCanada.ca, a large percentage of customers who enter alternative lending loans feel as though they were pressured into the loan because the offer would be taken off the table shortly (whether this is just a tactic by other dealers or they truly felt the offer would be pulled remains to be seen.) What is worse, is in these high-pressure situations, the customer was not able to carefully review the material before agreeing to the loan, and now they have agreed to conditions they were not aware of or did not fully understand.
We recommend that before you sign on the dotted line, that you step back for a few hours to review and understand the terms and conditions, ask us questions, and relieve yourself of some of the stress that comes with a new purchase. If English is not your first language, we would recommend having someone you trust review the information with you so you can be confident you understand the terms you are agreeing to. Do not be afraid to ask us questions either, we are here to help!
Purchasing a new vehicle is stressful, we get it! It is not something that happens very often compared to other purchases, it is a high dollar amount, and it is something you are going to use every day once you take possession. Then you find out that you do not qualify at a typical lender your friend might have, and you need to look at alternative options. Finally, you get into loan agreements with unfamiliar terms and legal jargon and things get even more stressful.
Let’s eliminate a lot of the stress and work together to make sure that when you do decide to upgrade your vehicle, that you’ve taken all the necessary steps to make a well-informed decision and not suffer buyer’s remorse days, weeks, or months down the road.
