May 14, 2008
Let's test your credit knowledge with 5 everyday situations.
Question 1: All else being equally who would have better credit?
Client A: This woman has a Visa card with a $5000 limit and routinely
charges $4500 to her credit card per month. She makes sure that she
pays off her balance every month.
Client B: This woman has a $15,000 limit on her Visa card and carries
an average balance of $10,500. She only makes the minimum monthly
payment require by Visa.
Answer: Client B
Explanation: Credit bureaus receive their information from Visa once
a month (as they do from all credit issuers). As a result, credit
bureau companies cannot determine if the credit balances are paid in
full or just partially. As a percentage Client A has a higher balance
on his credit compared to the credit card limit (90%). Client B has a
credit card balance of only 70% of her limit. As a rule of thumb you
should always keep you credit card balances at less than 75% of its
Question 2: All else being equally who would have better credit?
Client A: This man has managed to save in his RRSP accounts over
$250,000. In addition, he has over $150,000 in various savings
accounts. This man pays for everything with cash and does not have
debt or credit cards of any kind.
Client B: This man has 3 credit cards and routinely carries a debt
load of over $25,000. This person has total savings of $500 and thus a
network negative network of $24,500.
Answer: Client B
Explanation: Net worth is not reported to credit bureaus. In fact,
without any debts, Client A's credit history would be bare and thus he
would have a very difficult time trying to get a mortgage at all.
Client B would have a fairly easy time trying to get a mortgage.
Question 3: All else being equally who would have better credit?
Client A: This woman is a brand new employee at a fast food restaurant
earning $8.50/hr. For the last 18 months she has had a credit card
with a $2000 limit. She rarely carries a credit card balance that
Client B: This woman is a doctor and makes an average declared income
in excess of $250,000 per year. She has had good credit for years but
has recently closed all her debts and lumped everything into a single
brand new loan.
Answer: Client A
Explanation: Income is not reported to credit bureaus, so the incomes
listed in the question are a red herrings. Client B has recently
closed all her credit cards and other loans thus effectively reducing
her credit history to a very short period. You should never close all
your credit facilities at once like that. If you wish to close a
credit card make sure your new credit card has been active for many
months. (12 to 18 months)
Furthermore, being so new, client B's loan would be right near its
limit and this would also hurt her credit score.
Question 4: All else being equally who would have better credit?
Client A: This man has had a mortgage for over 20 years with a
current balance of $50,000. He has never missed a payment on the
mortgage and has absolutely no other debts or credit cards. This
person uses their debit card frequently.
Client B: This man has one credit card with a $2000 balance. They
have missed one monthly payment 8 months ago. They had some minor
missed payment 3 years ago.
Answer: Client B
Explanation: Mortgages in Canada are not reported to credit bureaus.
I don't know any official reason why. They are reported to credit
bureaus in the USA.
Client A would be nearly invisible to the credit bureau and thus it
would be assumed that he has bad credit. No credit equals bad credit.
He would find it very difficult to get a mortgage. Client B would
not have a problem.
In a marriage or common law relationship, it is very important that
each spouse has their own credit since a mortgage will not be reported
to either of their credit bureaus.
Question 5: All else being equally who would have better credit?
Client A: This woman declared bankruptcy 6 years ago and was
discharged for bankruptcy 5 years ago. She currently has a credit
card with a $10,000 limit and an average balance of $4000. 3 years
ago, while on an extended vacation she missed two monthly payments.
She quickly made up for the missed payments upon returning from
vacation and has never missed a payment since.
Client B: This woman travels for work and is out of the country a
lot. As a result, she has a splattering of missed payments spread
over the last 4 years. Her latest missed payment was 3 months ago.
She currently has a credit card with a $10,000 limit and an average
balance of $9000.
Answer: Client A.
Explanation: This is a trick question. Client A would undoubtedly
have a better credit rating. However, banks will forgive a bankruptcy
but never a missed payment after a bankruptcy and that is what she
has. Thus, client A would find it very difficult to qualify for a
mortgage despite her high credit rating. Client B would not find it
too difficult to get a mortgage.