What is credit? 

On a very basic level, it is an indication of how trustworthy you are.  This information is created by you and is held at the various Credit Bureaus for financial services, and utility granting companies to access.  Your credit is graded by a score and lenders use this score in their internal matrix to see where you fall among their lending guidelines.  If you are within their lending guideline, Congratulation!  You get that loan/line of credit/credit card/mortgage you are seeking.  If you do not, too bad, so sad.

There are two types of credit bureau checks... Soft Hits and Hard Hits.

Soft hits are when a company accesses your credit to get a profile match for identification purposes.  Name, Address, Date of Birth, Social Insurance number (Canada), phone number, previous address, employment details and employment history.  This does not usually make your Score or as some call it Beacon score move down much, if any.

Hard hits are when a lending or utility company accesses the data on your previous credit experiences to determine how credit worthy you are.  This will make your Beacon score slide down.  The more credit inquiries you have, the lower your score will fall and the less likely you will get your loan/line of credit/mortgage/credit card.  It is very important to have as few hard hit inquiries on your credit bureau as possible.  Be very selective about which credit "products" you are considering applying for.  Shop around.  Get the best interest rate as possible, and before you do an application, try haggling with the company to get an even better (lower) interest rate.  Remember, you are the customer, and the lower the interest rate, the less money you have to pay back for borrowing!!!

How many times should you apply for credit per year?

That is a million dollar question.  In my opinion, after doing a lot of research and working for a bank for about 8 years, "No more than 4."  Any more than that will put up a Red Flag and you will look like a "Credit Seeker" or a potential risk to the lending institution. (Why is this person asking for so much credit?)  And be very selective about who you apply with.  Typically, doing an inquiry with an "A" lender, or a bank, will lower your score not too much.  But when you do an application with a "B, C, or heaven forbid, D" lender, your score can plunge dramatically.  It can take a very long time (in some cases, years) for you score to climb or "heal" so be very selective.

Here is a trick to see if you should apply for credit.  Find out what you Total Debt to Salary Ratio is.  Most lenders will only lend if your TDSR is under 38% to 45% meaning that no more than 38% to 45% of your salary goes to bills each month.  Finding one that goes to 45% is difficult, by the way.

Take your gross anual income and divide by 12 months.  Multiply that by the percentage of the lending institution. i.e. 40%.  Subtract all your monthly bill payments from that ... i.e.: your rent/mortgage, credit card minimum payments, loan payments, lease payments, child support payments, student loan payments... the amount left over is the amount the new credit product minimum payment should fit into.  If it does, consider applying.  If not, don't waste your time and precious credit score.

$28,000 / 12 months= $2333.33   $2333.33x40%= $933.33

$933.33-650(rent) - 25.00(visa) - 240.00(car loan) = $18.33

Product applying for: $5000.00 line of credit.  Minimum monthly payment is 3% of the outstanding amount.  5000x0.003=$150.00  ... more than $18.33 therefore you cannot afford it.  You are over extended, or sufficiently obligated.

What effects credit?

How long you've been in your address and previous address.  Same with employment.  It does not look good to constantlly be hopping from address to address and job to job.  If could make a lender think you are unstable, or flighty.

Owing a lot of money to many different credit lenders will lower your score.

Not having any credit.  "0" credit is usually bad; how can a lender lend you something if they don't have an indication of how you will be at paying them back?

Paying you bills.  Paying your credit products and in some cases, your utility products on time consistently will make your Beacon rise!  Not paying them on time will be reported and your score will.

Items that are late are categorized (here in Canada) as 30 days, 60 days, 90 days and 120 days past due.  Say you were late paying your credit card for a month and a half twice.  That will show on your bureau as 2 times 30 days past due.  Not Good.  Here is a trick.  If you are finding it tight to pay on your due date, check with the lending company to find out WHEN they must report to the bureaus.  Some must wait until your payment is officially 30 days past due.  So that may give you a little more time to pay the bill BUT pay it before it goes 23 days past due.  That way, they have 7 days to log your payment into their systems under the 30 day mark.

How can you see if your credit is healthy?

First, go to the credit bureau's website and see how to order it.  www. equifax. ca and www. tuc. ca are the for Canadians.  Order your credit profile from the major credit bureaus.  Check the information carefully.  You would not believe how many times incorrect, damaging information is reported to the wrong person's profile.  If there is items on there, inform the bureau to have it stricken from your file.  If a credit granting company has reported wrong or old info about your dealing with them, contest it.  The merchant onlly has so many days to prove that it is correct.  If they cannot, or do not, it is removed from your bureau.  Check with the various credit bureaus, this differs from one to another.

What if you have really, really crappy credit?

You must look and see if you can repair it.  If lyou have an unpaid debt that isn't too large, and is fairly new to your bureau (reported within 1 to 2 years) pay it.  Make sure you keep the receipts and have the collection agency report it paid.  Demand that they do it immediately.

Debts stay on your bureau for x amount of years, and then they are stricken from the file.  With Equifax (Canada) it is 6 yrs.  Say you have a large amount owning, and the company hasn't sued your for the amount, and it is five years old, it does not make sense to pay it, because as soon as a payment is made, it starts that 6 year clock all over again.  Wait that one out.

If the company has sued you, it can be posted by the company again, even at the end of the x years.  It will also show in the legal actions against you section on your bureau, if they have that section.  Best contact them.

If you haven't been sued, but they are threatening it, ask if they would consider trying to cut you a deal... after they state their price, dicker.  Say you owe 5k and you could get your hands on 3.5k ... they want 4k ... ask them to accept the 3.5k and forgive (wipe out) the remaining.  Chances are, they will take it.

While you are slogging through the mire of paying and waiting, you need to establish good debt history.  This could be a loan or a revolving credit product, like a credit card.  If you apply jointly with someone with excellent credit, make sure that the company will report the item to both your credit bureaus.  Not much sense in doing that if only the primary or person with good credit gets the reporting.  Another option is to apply for a credit card that will allow you  to put money down on it and hold it in trust for x years.  Your credit limit is usually equal to the amount you put down.  This is called Hypothecation.  The interest is usually higher and the rules for the credit item are usually stricter, but the trade off is getting good credit history reported to your bureau!  And for Pete's sake, don't max it and start having late payments again!!!

So, in closing, credit is not rocket science, but it is something you must nurture.  Take care of it and it will be there when you need it.