How to protect your credit rating even when you’re struggling to make ends meet

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By Sandra Fry

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Do you have competing objectives for your finances? Maybe you want to pay off your debts, but keep living the lifestyle you’re accustomed to. Or you want to protect your credit rating, but can’t see how to change your spending habits.

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Whether you call them goals or objectives, circumstances will often influence your priorities. And it’s OK if they compete, as long as you keep moving in the general direction you want to go.

Lately, clients have been asking how they can protect their credit rating while struggling to make ends meet. Living costs are high right now, we all get that. But if you are using credit to get by, what you don’t know about credit could inadvertently hurt you.

Keeping it super simple, your credit rating is made up of your credit report and your credit score. The report reflects the history of your credit behaviour. It contains a list of active and recently closed accounts and how you’ve used them, as well as information about any trouble you’ve had with the credit you were granted.

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Your score is separate from your report. It is a number that lenders use to calculate risk, and it’s based on what is on your report. That means if your report is accurate, good or bad, your score will be accurate as well.

The most significant impacts on your overall rating are payment history and credit utilization ratio. However, it’s not as simple as making your minimum payments on time.

The importance of paying at least the minimum on time can’t be overstated, but all your credit payments need to be made on time and according to your lending agreements. The best way to ensure you don’t miss any payments is to use a paycheque planner. Map out when your payments are due and how much you’re required to pay. Then set up either automatic payments through your online banking or prominently mark due dates and amounts on a calendar.

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It can be tempting to make a credit-card payment and then use the card a few days later to shop for what you need. Unfortunately, if your payments don’t bring your balance owing down, this will reflect negatively on your credit score. There’s no easy way around this, and if money is super tight, thankfully, you’ll still be able to buy what you need. It’s more important to look after your well-being than your credit score. You can work on rebuilding your rating later when your budget eases up.

An often-overlooked obligation is our cellphone bill, which is a unique form of credit. If you have a contract, you have agreed to pay the full amount each month. There is no limit, so as soon as you don’t pay everything you owe, you are deemed to be over the limit. Going over an approved credit limit on any type of credit account is hard on a credit score, which makes cellphone bills an easy way to build a credit rating and one of the fastest ways to wreck one.

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How much of your available credit you use also matters. For instance, on credit cards and lines of credit, you want to keep the balance owing to less than about 65 per cent of the limit you were approved for. That means if your credit-card limit is $5,000, ensure you don’t typically owe more than about $3,250 on an ongoing basis.

When I explain credit utilization ratios to consumers, I often get either a confused look or they question why that is. The reason is simple: if you charge your cards to the limit and then face a problem with making your payments, you will struggle to keep up.

But raising your credit limit to keep the ratio below 65 per cent isn’t the answer, either. A higher limit means there’s a chance you will incur more debt, either on that revolving credit card, a line of credit or a new form of credit.

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Most consumers want to protect their score so that they can apply for credit in the future. But if you’re struggling to keep up, it’s better to pare down your living expenses as drastically as you can, increase your income wherever possible, and work on getting by until your situation improves. Resist applying for new credit because the inquiries themselves will lower your score.

Also look for other ways to get what you need — for example, use local buy nothing groups, community services or food banks. A non-profit credit counsellor in your area can share their expertise and insights with you as well.

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You can always rebuild your credit rating once your situation improves, because any mistakes or sacrifices you make now won’t impact your credit forever. Avoid basing your self-worth on your credit score. It is so much more important to do what you can to take care of yourself and your family during these challenging times.

Sandra Fry is a Winnipeg-based credit counsellor at Credit Counselling Society, a non-profit organization that has helped Canadians manage debt for more than 26 years.

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