Worried about your credit rating? Avoid these 5 credit card mistakes – MoneySense

You don’t think about your credit rating opening doors for you—until it abruptly swings one shut. However, in order to appreciate what you could do differently to improve your credit rating, it helps to understand what exactly that is.

Your credit rating is actually made up of two parts of information—your credit report and your credit score—and each plays a specific role. Along with some personal information (your name, address, birthdate, employment details and when you last applied for credit), your credit report contains a list of companies that have inquired about your credit history, and that you’ve obtained credit from. This list of your credit obligations shows how you use credit on an ongoing basis, including when you opened the account, your credit limits, the outstanding balance, if you pay on time, how often you make late payments and if anyone is joint on the account. If any of your debts are in collections, they will show in a different part of your credit report with more detail. 

If you’re curious to see what’s on your own credit report, take a look. In fact, everyone should check their credit reports (yes, you have two of them in Canada) once a year for accuracy. You can get your credit report for free (and you might be surprised by these 7 things that are not on your credit report).

As strange as it may sound, your credit score is not on your credit report. Your score is only needed when you apply for credit, and it is based on what is on your credit report at that minute. Your score is actually a ratio that indicates to a potential lender how likely you are to repay any new loan they give you, based on how you’ve handled credit in the past. For example, if your score is 680, that tells a lender that for every 680 out of 900 people whose situation is scored the same as yours, 680 are likely to repay the money they borrow. It stands to reason that the higher your score, the more likely a creditor will lend you money with favourable terms and conditions. As such, your credit score is very sensitive to changes in your financial situation and in how you use credit. 

Avoiding these five credit card mistakes will give you less to worry about when it comes to your overall credit rating.

Making your payments late

Have you ever lent money to a friend, only to have to chase them down to get back what they owe you? Credit card companies are often in that same position—and while they might not feel like a friend, they most definitely want to be paid as you had agreed to do. 

Late payments with credit cards will cost you big-time. In addition to interest charges at the current rate in your credit card agreement, depending on how late you pay and how often it happens, your interest rate can go up, fees could be tacked on and your balance owing can quickly grow out of control. In the same way compound interest (interest on interest) can be good for your investments, it can be terrible for your debt level.

The fix: Debt payments shouldn’t be something you get around to after spending on non-essential items—they should be your primary essential payment. Make a list of the payments you need to make each month and ensure you are able to pay the required amount using the money you have coming in (ideally more than the minimum, where applicable). Then, set up calendar reminders so that you make your payments on time. If you’re very disciplined, you could go a step further and set up automatic payments through your online banking system. By setting up the payment yourself, rather than allowing your credit card company to take the payment on your due date, you maintain control over your bank account should an unexpected expense, like a car repair, come up.

However, if you routinely find yourself falling short with expenses that must be paid in cash (for example, daycare or rent), it’s time to take a serious look at your budget; your credit rating might be the least of your worries. You likely need more help with your money and debts than this five-point tip list. You can get more information and some guidance by contacting a non-profit credit counselling organization in your area. 

Applying for more credit cards than you need

Have you ever applied for a credit card at the till to save 10% on your purchase, or walked through a store and filled out an application to get the free gift? Every time you apply for credit, an inquiry is registered on your credit report. While a few inquiries at different points in your life are only natural, and acceptable, continually shopping for credit is not. 

When you apply for a lot of credit cards in a very short period of time to see what you might get approved for, that is considered shopping for credit. All of the inquiries work against your overall credit rating and, worse, the credit cards granted to you can lead to an unaffordable amount of temptation spending. 

The fix: Apply only for what you need and can afford. Accurately determining what you can reasonably manage requires a household budget that accounts for all of your monthly, occasional and annual expenses; long-term savings; and debt payments and obligations. 

Paying your credit card off too fast

Is that really a thing, paying credit cards off too fast? It certainly can be. If you are worried about getting into debt with a credit card you might decide to pay it off as soon as you use it. From a money management perspective, that works; however, in terms of using the credit card to build a credit rating, you’re not doing yourself any favours.

The fix: Wait until the bill comes and pay it in full before the due date each month. This allows the credit scoring system to see that you’re using the card, and by paying it off before the due date you aren’t charged any interest.

There are a few ways to ensure that you have the cash ready to pay your bill. One is to set up a separate bank account for payments. Rather than paying off your credit card immediately, transfer the money directly to the separate account. Then, when the bill comes, you’ve got your payment ready.

A second easy way to use a credit card and not end up in debt is to pre-authorize a recurring bill payment to your card (for example, a monthly subscription) and then tuck the card away at home. This way, you’ll know how much of a bill to expect every month, you can account for it in your budget, and you could even set up a recurring credit card payment from your bank account to ensure it’s paid on time every month. If you want to build or rebuild your credit rating with a credit card, it’s essential to use the card, but you don’t need to use it a lot.  

If you’re concerned that your bad credit is hurting you, just be aware that there is no “hack” for fixing a credit rating fast. So rather than worry about what you can’t control, focus on what’s within your control and on what you can change. It’s never too late to establish a spending plan or break up with your credit cards for a few months to help yourself get on track again.

Scott Hannah is the President and CEO of the award-winning, non-profit Credit Counselling Society, which has helped more than 600,000 Canadians since its inception in 1996.

This article was originally published on Oct. 1, 2019, and updated on Oct. 26, 2022.

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