Credit Score and Rules for Borrowing

Financial literacy is an essential component of a person’s independence. When you’re trying to make those big life decisions — “Where should I work? Where should I live? Should I buy a car? Do I have enough money to get by on a day to day basis?”, you have to be financially literate in order to make good choices.

This article will help you to understand how you can manage your credit behaviour so that when you do need to borrow, in the long term, like buying a house, you’ll be able to do so.

Credit Scores

Let’s talk about the concept of credit worthiness, how our credit history impacts our ability to borrow money and how much it costs us to do so.

So how do creditors assess our credit behaviours? Where do they get this information? Among other sources, creditors will review your credit history using your credit report. Now, you credit report is like a life-long report card. Creditors, lenders, landlords, employers and other parties like insurance companies, utilities and mobile phone companies are able to access your credit report in order to view your credit history and credit score.

From this report, they’re able to see the type of credit that you’re using and how responsibly you’re using it. Your report contains information about the credit you use including credit cards, retail or store cards, lines of credit and loans.

Anytime you’ve had non-sufficient funds payments or written bad cheques, any chequing and saving accounts that have been closed “for cause” due to money owing or fraud committed, all of it will be on your credit report. It will also indicate any bankruptcies or court decisions against you that relate to credit. If you’ve ever had debt sent to a collection agency, it will appear on your report and several other items.

Information generally stays on your credit report for a period of 6 years. However, some information may stay longer or shorter. For instance, a declaration of bankruptcy may remain on a credit report for longer. If you’ve consistently demonstrated good credit behaviour, this will appear on your credit report as well and positive information, such as making regular payments on time, can remain on your report for a longer time period.

Now, let’s talk about your credit score. A mathematical formula calculates your credit score using the information from your credit report.

The score is a 3-digit number that falls between the range of 300–900.

The higher the score, the more credit worthy you are. This score helps creditors assess your credit behaviours and how risky it will be for them to lend you money. Some parameters that can impact your score are:

· How long you’ve had credit for

· Whether you have an outstanding balance or your credit cards [this includes any joint credit cards]

· Whether you regularly miss payments

· The amount of your outstanding debts being close to your credit limit

· The number of times you try to get more credit

· The types of credit you are using

· Whether your debts have been sent to a collection agency

· Any record of insolvency or bankruptcy

So, how does your credit score ultimately affect you?

A good credit score will help you to ensure that when you apply for credit and you actually need it, you’re more likely to be loaned the money. Additionally, having good credit worthiness will often allow you to have more preferential interest rates. In general, it’s important to be aware of your own financial health and how creditors will view you.

You can actually obtain a copy of your credit report and you should. This will allow you to review your credit information. It will also allow you to detect any errors or anomalies like identity theft.

Rules for Borrowing

So, what are these rules for borrowing that you should follow to make your life ultimately easier?

1. The first would be: try to live within your means as much as possible. Before you buy something on credit, try to question whether you really need it and whether the benefits outweigh the cost of borrowing.
2. Always ensure you are using debt wisely. For example: don’t let balances sit on a credit card that’s accruing higher interest if you have borrowing room on a lower interest-bearing debt.
3. And finally, you need a solid plan. What is my plan to repay this debt? Before engaging in high amounts of debt make sure that you will be able to abide by the restrictions imposed on those debts. That you’ll be able to make all of your necessary payments and that you have a plan to ultimately repay the debts that you owe.

Every one of these guidelines is equally important.

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Next in this series of articles, I will continue with the Time Value of Money and its everyday applications. Till then keep Safe! ❤