BEING INTELLIGENT ABOUT CREDIT
Through our work, we have found that there is a real lack of knowledge concerning credit and bankruptcy issues. We hope that the following will clear some of this up.
Credit intelligence - what is it?
It's what lending institutions know about your credit history. Every individual who uses a credit card, finances an automobile or draws upon a line of credit has a credit history. Canadian credit rating companies such as Equifax, Trans Union, and Experion accumulate intelligence regarding individual and corporate credit histories. They assign them a score, or credit rating.
Credit rating
Your credit rating changes depending on your actions. If you pay don't pay your bills on time but then start doing so, your rating will gradually improve. Of course, the opposite is also true.
Credit rating scores range from 1 to 9. R1 is the best, while R9 is the worst:
- R1 - Great! You pay your bills on time
- R2 - Not bad! Your payments are often a month late
- R3 - Not so good - payments are regularly 60 days late
- R4 - Time to get some help - you take 90 days to pay your bills
- R5 - Definitely not good - it takes you 1/3 of a year to pay your bills
- R6 - This rating is not often used
- R7 - You're in trouble - you are trying to consolidate debt and get creditors to write some of it off
- R8 - One step shy of bankruptcy - creditors are trying to repossess hard assets like cars or furniture
- R9 - No more credit for you - creditors have dismissed your debt as uncollectable (and reported it as such to credit bureaus). You may be bankrupt
What are consolidation orders, consumer proposals and debt management plans?
All of these things are ways of managing debt that you can't repay. It works like this: you can't pay your bills, so a credit counselor helps you to convince creditors to take less than you owe and write off the rest.
The idea behind this is that creditors will get something from you rather than nothing. A $30,000 credit card bill could be reduced to $15,000 and you begin to pay it off. Sound good?
Well, it's not. As soon as you forward such a proposal to a creditor or begin to consolidate your debts, credit rating agencies assign you a rating of R7.
An R7 credit rating means that you will find it virtually impossible to procure good credit such as a loan or a mortgage from a major lending institution. Your ability to procure credit of any kind at a reasonable rate just disappeared.
Good credit versus bad credit
What is bad credit?
Bad credit is the high interest kind. Credit card debt is a prime example. Card companies typically charge 18% interest or more. That's a lot!
Compare that to Canadian banks' prime lending rates of approximately 5%. A typical personal line of credit or mortgage might cost you 5% to 10%. And if you don't abuse it, your credit rating will grow stronger. Now that's good!
If you would you like to learn more about credit repair, bankruptcy and similar issues, get in touch!