58 – The Three Elements of Credit Worthiness – It’s Not All About Your Credit Score

Wayne Kay  0:04  

Welcome to the Debt Matters podcast where we help Canadians find solutions to their debt with Licensed Insolvency Trustees from across Canada. I’m Wayne Kay and in today’s show, we’re going to be discussing the three elements of credit worthiness, or I guess we can say your credit score, but it’s not all about that credit score. 

We’re going to dive into learning what is credit worthiness? What does that mean? And there’s three elements involved with that credit worthiness. How does that really affect you? Are there things you can do to improve your score? That’s a very important one. 

And also, let’s say you had an issue when you were younger, and you maybe had some debts that are still on file. Is there anything you could do to make those debts ever go away when it comes to your credit report? We’re also going to find out maybe some of the big mistakes people make when it comes to their credit score. 

To help me out with this today, my guest, Mary-Anne Marriot with Allan Marshall and Associates, Licensed Insolvency Trustee, with offices in Alberta, New Brunswick, Nova Scotia, and Prince Edward Island. Mary-Ann, thanks for joining me today.

Mary Ann Marriott  1:18  

Awesome. I’m so happy to be here. This is a topic that I’m very passionate about. So I’m very excited to dig into it.

Wayne Kay  1:24  

What is it about this topic that you’re excited about?

Mary Ann Marriott  1:28  

I think what excites me about it is that it’s something that I believe everybody needs to know. It’s something that I believe most people don’t know. And I’m hopeful that when I get it out there into the ears of the community, that they’ll really take some notice and really do some things differently. That it is going to help them have a happier, healthier life going forward, happier, healthier financial life going forward. 

Wayne Kay  1:53  

Well, and when you have that happier, healthier financial life that actually does play into the happier life as well. So it does fit in there perfectly. When you talk about credit worthiness, what does that mean?

Mary Ann Marriott  2:04  

I kind of came up with that term, because I’m always hearing credit score, my credit score, my credit rating, my credit score, and people get really hung up on the score part of it. Because quite honestly, when you go to apply for credit, if you don’t qualify, no one says your credit worthiness is off kilter. They just say your credit is bad or your credit score is too low. 

So credit worthiness really came about when I was doing some presentations, and I looked at the fact that it’s not just about your credit score. There really are three elements of credit worthiness that people do need to be aware of, to ensure that they have the best credit score, credit rating. Well credit worthiness, see, I can’t even come up with a better word. It’s just the best word for it.

Wayne Kay  2:55  

Okay, so there’s three, and I’m on the edge of my seat here. I want to find out what these three elements of credit worthiness are.

Mary Ann Marriott  3:02  

So the first one is your credit score. And your credit score is, I think, the official term. If you look it up it says, an at a glance indicator of how, what kind of risk you are to a lender. And so scores generally range from 300 to 900. Typically, the mid range is 650-700. So your credit score really should be, I always say to people at least 600. I mean, you really don’t want to score below that. But from a lender’s perspective, it’s that 650-700 mark that really puts you on the map, so to speak, and makes you more eligible for credit. 

And I hesitated saying that, because it’s not really difficult to get credit these days. The issue really becomes what you pay for it – the interest rate. So 650-700, as a minimum, that’s where you’re starting to get into decent interest rates. If you’re below that, you’re probably going to get credit, but you’re going to pay a higher rate. So that’s your credit score. 

And then the second one is your debt ratio. And that’s how much that you owe to your income. And then the third one is your income level job stability. So that whole, what do you have for income? Do you have income? Is it stable? Where’s it coming from?

Wayne Kay  4:23  

Okay, so those are the three things. That makes sense. I was going to ask you what the difference was between if you have a 650, or you have a 850? Is there any real difference? Do I need to stress about that? 

Mary Ann Marriott  4:37  

I think I answered that right, but I’ll emphasize a few things. You know, it’s not just about getting credit, and this is why I’m very passionate about this. And I think that this is a piece that we’re missing understanding of credit, because I’ve heard people say, oh I don’t want credit. I’m not going to use credit. I don’t see any need. I’m not going to get a mortgage, not going to get a car loan again. So it doesn’t really matter what my credit score is. 

And it does matter, because it’s tied to so many things nowadays. It’s tied to renting, it’s tied to your insurance rates, it’s tied to getting jobs. I mean, all of a sudden your credit worthiness the whole view is, it matters. And it matters in a lot of areas of your life. And it’s disturbing to me and frustrating to me that the majority of people either don’t understand. I think everyone knows it exists. We know it exists. But we don’t know much about it. We don’t know how to improve it. If there’s an issue – we don’t even necessarily know how to get the information to look at it. And so it’s kind of a frustrating system.

Wayne Kay  5:46  

Right now, I have to admit to you, I never looked at what my credit score was, what my credit worthiness was. I had no idea, no clue where it was on the list until I think you and I talked a few months ago. And at that point, I went and looked to find out what it was.

Mary Ann Marriott  6:06  

Hey, I’m clapping. 

Wayne Kay  6:09  

All was fine with the world. But it didn’t make a difference to me. But lately, I noticed when I go to get insurance, they’ll say, Oh, can we do a credit check on you or something? And I’m like, Yeah, okay. But I don’t really think that’s fair, because I still have to pay my insurance anyway. So why should it have mattered?

Mary Ann Marriott  6:27  

What they don’t tell you is that if you have – now they’ve twisted the words of this a little bit, but I’m going to say it in reverse. So if you have a poor credit score, you’re going to pay more interest. Now, the way the industry phrases it is, if you have a good credit score, we’re going to reward you with a lower insurance payment. But at the end of the day, what I’ve seen happen is, basically, your insurance rate goes up if your credit score is low.

Wayne Kay  6:56  

Which doesn’t seem to make any sense. People who do very well and have great credit get a better deal and the people who really need it have to pay higher rates. It’s just not fair.

Mary Ann Marriott  7:09  

No, it isn’t. And I call that the kick, they kick you when you’re down syndrome. And here I’ll tell you a little story about it really not being fair/ It’s my own personal story. One of the reasons that I realized all of this is I figured out that I had an issue with one of my credit reports. They had two files on me. And I wasn’t checking my report, like you didn’t need to. Life was good. Everything was okay, I didn’t see any need to. 

And one day I checked, probably because I was talking about it and figured I should check it. What I discovered is that Equifax had two files on me. When I looked at my score in both places, Equifax was 100 points lower than TransUnion, putting me into a very dangerous, low credit score with Equifax. 

I went to get new insurance. I was looking for house insurance or shopping around. And she said, Can I do a credit check? And I said, yes, absolutely. And then because I know this, I said, Oh, wait a minute, who do you use? And she said, Equifax. I said, Well, here’s the deal. I have an issue with them. I’m trying to resolve it. My scores are very low. She looked at it and basically said, we’re just not going to do that credit report. She said, I would have paid $400 more per year had she done it. Whoa, yeah. And 

So here’s a person who knows what I’m doing, I think. Responsibly uses credit, had a good credit score at the other credit reporting agency, but because they use the one I had that issue with, fortunately, I had someone who used common sense, which as we know, isn’t very common. But what if I hadn’t? Yes, what if they hadn’t told me that? What if we hadn’t had that discussion? I would have just paid $400 more a year and never would have known.

Wayne Kay  8:53  

Wow. Okay, so after that great story, how do we go about improving our scores?

Mary Ann Marriott  9:02  

This ties directly to credit worthiness. So the credit score is just the indicator. Basically, we’re going to set that aside for a moment. The debt ratio is how much debt you use to income. So if you use very little debt to income, then your score is going to be higher. 

Now, I’m going to twist that a little bit and say how much of your credit you use and how much of your available credit you use. So I should just point out that I’m going to talk about debt ratio from that viewpoint. But there’s also the bank’s viewpoint, which is how much debt you have to income. I’m going to step away from the bank’s view for a moment. 

Here’s an example. You have a $10,000 line of credit, you use it and pay it every month. Your credit utilization is low because you’re paying it off every month. If you carry a $2,000 balance, you’re below the recommended guideline of 30% of your available credit. So $10,000 line of credit, 30% utilization will be $3.000 Your two thirds below, you’re going to have a strong credit score. 

If you use $8,000 of the $10,000, now you’re above the credit utilization recommended percentage. You are going to see your score drop because of that, if you’re constantly at your limit and bouncing up and down to your limit. That’s where you’re going to see a big drop in your credit score. 

So my number one piece of advice, when I’m helping people repair their credit score, is credit utilization. And I just had this discussion with someone this week. We looked at their situation. They went to get a consolidation loan, the bank said, No, your scores are too low. So I dug into it. And they were paying all of their credit utilization was good, except for one credit card, it was a $10,000 balance, and they were at $10,000. And it wasn’t coming down at all. And so for them, I said, that’s the one you want to tackle. You need to get that down to at least $5,000. So you can start to see your score improved, so that you will qualify for a consolidation loan. 

So that’s the one piece and then you know, honestly, I would say the whole credit utilization is really where most of the recommendations come in. So pay your credit down, don’t max it out, don’t miss payments. Keep it below that 30%. Those are the pieces of advice that come up most often. 

But the other piece of credit worthiness, which I’ll mention. Let’s say you have an excellent credit score, let’s say you have a low credit utilization. So you’re not using a lot of the credit you have, not overusing it. But you don’t have an income, or you’re self employed. Self employed, people do write off all their income for income tax purposes. So their net incomes are low. Those are going to impact your getting credit, because of course, you need the income to support the payments. 

So I mean, the advice on that side is easy. One, obviously, to get income. But two, if you’re self-employed, you’re going to have more luck dealing with the non traditional big five banks, because there are other lenders that look at your gross income as opposed to your net income, and there’s a little bit more leeway.

Wayne Kay  12:09  

Okay. That makes a lot of sense. What about increasing your limits?

Mary Ann Marriott  12:15  

Yes, I’m so glad you said that. Remember, I have said before, that there’s a thin line between financial strategy and financial disaster? So actually, that’s it. Actually, that’s interesting, because the same person I was just telling the story about said you need to get your credit card paid down. I actually think this was another $25,000 line of credit, and was running into the same issue. I said, Okay, here’s another suggestion, I’m going to preface this with the fact that there’s a thin line between financial strategy and financial disaster. And so another strategy is you can ask your creditor to increase your credit limit. You automatically bring your credit utilization percentage down, and you will see your credit score go up. If and I bet you can finish the sentence for me, Wayne,

Wayne Kay  13:06  

if they don’t use their extra credit?

Mary Ann Marriott  13:09  

Absolutely, yes. So there’s the thin line, right? Financial strategy is to get the limit increased, don’t use it, your score will automatically start to come up putting you into a better situation. But if you use the available, the extra credit they’ve just given you, then of course, you’re going to counteract that entire plan.

Wayne Kay  13:29  

Okay. So when we talk about  the debts and the issues that happen. Do those debts ever go away on your credit report? Or is it always there?

Mary Ann Marriott  13:39  

It depends who’s looking. So again, I’ll quantify that statement. There’s general timelines for specific things that get reported. As a general rule of thumb, what I always say is, everything’s on your credit report for six years from the date of last activity. And I emphasize the date of the last activity. 

Here’s an example. You have a credit card, and you pay it off. That’s going to show for six years from the date that you have paid it off. You file for Bankruptcy, and you’re discharged, that’s going to show for six years from the date you’re discharged. If you have a piece of credit that you don’t pay, so let’s say you have a Visa card, and you don’t pay it, and it’s with one of the big banks, we’ll just say big bank. They sell it off to a collection agency. They go there, we’re done with it. So they’re going to report it as the account closed, and they’ve sent it off to collections. That’s going to stay on there for six years from the date of last activity. 

So the date that they have closed the account, however, guess what – it shows up under the collection activity as a current collection account. So let’s say the collection company tries to collect from you for four years, and then they stop. While we know it stays on there for six years from the date of last activity, they don’t try to collect for five years. Logic dictates that in a year it’s going to be gone. But guess what they do? They pull the file at five and a half years, contact you again and the six years starts over. 

This is what I see all the time. I often have people contact me and they go, I just have a mess. You know, I was young and stupid, their words, not mine. I was young and stupid, I made mistakes, I didn’t pay stuff, I walked away, and I just need to clean this up. It’s not going away. 

And the other thing that happens is that, $1,000 TELUS bill, six years later, or seven or eight, or however long it’s on there is now $8,000. It’s crazy how much they grow, because of the interest that gets added. Well, this account is in the collection company’s hands.

Wayne Kay  15:41  

Okay, but that’s where you have people call you with these situations?

Mary Ann Marriott  15:46  

Yeah, very often. And, and the other little piece of that is that, and I’ll just add, because I think this is important, because there is a statute of limitations on debt. And I’ll just explain that just before I do that, I want to mention, if you check your credit report, you are going to see everything. 

That confuses people sometimes because they’ll get the report and they see something from 10 or 15 or 20 years ago, as long as it’s not reporting. And that reporting date is more than six years ago there. Okay, I just want to make that point. 

The other thing that I was going to mention is the statute of limitations, which is 10 years on debt.  What that means is that 10 years after you’ve incurred the debt, they can’t go to court to collect, but it can still sit with a collection company. They can still try to collect, they can still report to your credit bureau, and they can still pull your score down. So even though legally they can’t pursue the debt, it can wreak havoc on your credit worthiness.

Wayne Kay  16:45  

We have three minutes left, what’s the biggest mistake people make when it comes to their credit score?

Mary Ann Marriott  16:51  

The biggest mistake that people make is not being aware of it and not having some kind of a system where they’re going to be notified if something happens to it. So I’ll use you as an example. And me. 

You said you haven’t really checked, you didn’t really need to. I said the same thing. That issue that I had, if I had been subscribed to a service that notified me that my score was low or that there had been an inquiry or something was delinquent, I would have caught that much sooner and could have rectified it sooner. 

So I think the biggest mistake people make is just assuming it’s fine or not caring if it’s fine. And what I would offer on that is you can either pay for a subscription service through Equifax or TransUnion, the two main reporting agencies. But there’s other third party places where you can get it for free. Your bank, Credit Karma, Borrowell. There’s other places you can sign up, it’s free. They will notify you by email, if there’s anything happening on your score, and you can catch it quickly and take steps to make it better.

Wayne Kay  17:51  

Wow. Okay, that’s great advice. Once again, Equifax and TransUnion. All right, any final words of advice?

Mary Ann Marriott  18:02  

Just wishing you all happy, healthy finances and pay attention to your score because it matters in life in more ways that you can imagine.

Wayne Kay  18:10  

Absolutely. We’ve learned that today. And I thank you so much for sharing such great information. Mary-Anne.

Mary Ann Marriott  18:15  

Awesome. Well, thank you, Wayne. It’s been my pleasure. And as I said, I’m very excited about this topic. So I’m excited that it’s out there.

Wayne Kay  18:21  

Mary-Ann Marriott has been my guest today and you can learn more or schedule a free consultation with Allan Marshall and Associates Licensed Insolvency Trustees you can go to wecanhelp.ca.

And that is it for today’s Debt Matters podcast. Just make sure you subscribe wherever you get your favorite podcasts from and of course, if you want more information, you can always check out debtmatters.ca Should also mention if you know somebody who needs to know about this information, please share the podcast with them. Thank you for listening.