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How Important Is Your Credit Rating? Print E-mail

When you’re looking for a loan, mortgage, or credit card, your personal credit report is what lenders look at to make their decision. Did you know that 47% of credit reports are reported to have inaccurate or missing information? In some cases, this results in higher interest rates or even declined credit! There are many factors that can affect your credit, these are:

  • Number of credit accounts, the history of credit accounts that are open, the amount in each account, and the balance owing on each account
  • Payment patterns
  • Types of credit
  • How often and how recently you applied for credit

Determining your debt ratio can help you determine if you are a good credit risk. If your mortgage debt exceeds 28% of your income, mortgage lenders generally won’t approve your loan. Your total debt ratio should not exceed 36% to qualify for a mortgage. For these calculations, mortgage lenders look at credit card bills, student loans, car loans, and how your mortgage would impact your ability to pay.

How do I figure out my debt ratio?

Create a page with three columns. List all your bills in column one. List your monthly payments in column two. Then list your balance due for each bill in column three. For credit cards, estimate your monthly payments as 4% of the balance. For example: if you owe $1,000, list your monthly payment as $40, which is 4% of $1,000. To figure out your monthly income, take your gross annual income, which is your income before taxes and add to that any other income such as investment earnings, child support, alimony, Canadian Social Security benefits, etc. If your income is based on an hourly wage, multiply your average weekly pay check by 52 weeks. This will give you an estimated annual income. Now divide your monthly debt payments by your total monthly income. For example, if your total monthly income is $3,000 and your total monthly debt payments are $900, your debt-to-income ratio is $900 divided by $3,000, which is 30%.

Use these guidelines to determine where you stand in regards to your credit:

  • 10% or less: You're in good shape! Lenders see you as favourable. Make sure you get the lowest possibly rates!
  • 11% to 20%: You shouldn't have trouble getting loans but to be sure contact the Canadian credit bureau.
  • 21% to 35%: You're spending too much of your monthly income paying off your bills and you’re likely having trouble saving money.
  • 36% to 50%: It’s time to start developing a plan to get out of debt. Destroy your credit cards!
  • More than 50%: Don’t panic! Make an appointment to see a credit counsellor or a financial adviser to talk about your credit.

It is very important that you maintain a good credit profile. By paying your bills on time, you can be assured that you’ll be in good credit standing. A good tip to remember is to review your credit report annually to detect any inaccuracies. It also allows you to check for possible identity fraud. You should also contact Human Resources Development Canada (HRDC) in the case of identity fraud. Contact your local police department as well.

 



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