Q: My new roommate and I moved in together to make living more affordable. We were both having a hard time with money because rents and living costs overall are high in our city. We also work together and neither of us wants to switch jobs and live elsewhere. But we’re having a debate — he’s of the opinion that a credit score is what it is and it’s not worth worrying about. I’m of the opinion that a credit rating matters and I’ll do whatever it takes to keep my rating high. I’m saving at every turn and have really scaled back my lifestyle. He’s still living his life and I have to say that I envy him a bit. So can you settle this question for us: Is it worth doing whatever you can to keep your credit score high, or not? ~Marcus
A: Doing what you can to make living costs more affordable is a great idea regardless of where you are in your life or career. Even for those who don’t live in an expensive city, living costs in general keep going up, and so it’s important to factor that into your long-term budget planning. As for the debate you’re having with your roommate, there are some debates that I prefer not to wade into the middle of; however, this is not one of them. It’s a concern we hear time and time again, with some people even going so far as to make choices solely for the sake of their credit score. So without taking sides, let me share some details with you that you may not have thought about.
To help keep our credit score in positive territory, too much of a good thing isn’t always good. Here are four things that can be either a pro or a con, depending on your overall situation:
Closing old accounts
Everyone who uses credit has old accounts that we no longer use, or hardly ever use. Is it a good idea to close them to clean up our credit report? Maybe; or maybe not. Old accounts that stay open whether they are used or not tend to be revolving forms of credit, like a credit card or line of credit. Loans that are paid down to zero and can’t be used again drop off a credit report after six to seven years.
Closing old accounts means one less account to keep an eye on, so that no one uses it without our consent, and less temptation spending. It means that if we apply for new credit, the credit limit of the account we no longer use won’t decrease how much new credit is extended to us.
Keeping old accounts open, however, means we have the credit available should we need it. It means that if our situation has changed and we don’t qualify for new credit, we can use what we already have (as long as we can repay it). It also means that potential lenders can see how we’ve used credit in the past. If we’ve done it responsibly, that’s a good thing. We also need to use credit in order to establish or improve our credit score. Using an account we already have saves our credit score from the impact (i.e., decrease) of a new credit application.
Closing old accounts has its pros and cons. It all depends on your income, how you use credit, and what borrowing you anticipate doing over the next two to five years.
Increasing your credit limit
Have you heard that increasing the credit limit on your credit cards can increase your credit score? This can happen, but by increasing your credit limit, are you worried you’re just giving yourself more opportunity to get into debt? It can certainly turn out that way if you’re not disciplined with how you use credit. Increasing your credit limit decreases how much of your available credit you’re using (it’s best to keep credit utilization under 75 per cent), which ultimately can raise your credit score.
The toll the higher credit limits can take, however, can be severe. While your credit score will be in positive territory and help you land loan or mortgage pre-approvals with low interest rates and favourable terms and conditions, when lenders see how much credit you already have available to you, they will need to decrease how much they can lend you with the new application. This can mean the difference between buying the car of your dreams, or a reliable sedan (not that there’s anything wrong with reliable sedans!).
Stress about money worries and what that does to our health and lifestyle is the toll we tend to forget about until we’re in the midst of it. If we use the credit available to us with our higher limits, we can end up over our heads in debt. At that point, our credit score starts a quick slide down and it can take years to recover. The best credit card limit is the one you can afford; so know your limit and spend within it.
Making payments on time
Paying your credit obligations on time is one of the most important things you can do to help keep a good credit score. However, worrying about a good credit score when you’re short of cash for essential living expenses isn’t worth it either.
If you are making your bill payments before taking care of your most important expenses, e.g. rent or mortgage, basic housing bills, groceries, a reasonable way to get to and from work, and medication, reconsider your budget and communicate with your creditors to help them understand your situation. If you become ill and are unable to look after yourself and/or your family, it ultimately won’t matter if you have a good credit score or not.
Applying for new credit
If you need credit, applying for it is worthwhile. If you don’t need it, don’t apply. An array of credit cards in your wallet, contrary to popular belief, doesn’t actually mean you have a good credit rating. Every time you apply for credit, whether you are approved or not, the inquiry registered against your credit bureau file will lower your credit score. If you apply for credit on an ongoing basis, rather than during the periods in your life when you need it, you will be perpetually lowering your credit score.
Applying for credit is normal, even expected, when making large purchases. If you are shopping around for a car loan or mortgage, keep your inquiries within a two-week period in order to minimize the impact each inquiry will have on your score. Other than that, a deck of cards is meant for a game, not your wallet, where one or two suffice.
The bottom line on the cost of a good credit score
It takes a long time to improve a poor credit rating and only a short time to ruin a good one. However, your credit score will reward you for progress. As you learn new money skills and take positive steps toward improving a low credit rating, your score will increase. It will start slowly and build up over time. It can happen that you need to consent to a credit check when you least expect it, e.g., to rent a new apartment, so protecting your credit score and overall credit rating is worth it, but not at all costs.
Scott Hannah is president of the Credit Counselling Society, a non-profit organization. For more information about managing your money or debt, contact Scott by email , check www.nomoredebts.org or call 1-888-527-8999.
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