THIS ARTICLE discusses two scenarios for consideration in this series of presentations on using debt wisely: Are the statements, “An occasional missed or late payment will only negatively affect your credit rating for the next year or two”, and “Carrying a range of debt such as a mortgage, car loan, personal loans and credit card balances can negatively affect your credit rating” true or false?
The first is false. An occasional missed or late payment may negatively affect your credit rating for five years or more. Your credit rating is a measure of your creditworthiness – an assessment of the extent to which you can be expected to pay the amount due on time. It is an objective measure for all people so it will not take into consideration the special circumstances of your delinquency.
If an amount is due for payment by you and you have not paid it by the due date, that is a matter of fact. There are no ifs or buts; you may have just have forgotten to write the cheque and post it. However, none of that matters because the amount was not paid, so the fact of the non-payment on time is a red mark against your credit, like anyone else who may not have had the funds to pay.
On the other hand, with regards to the second statement, carrying a range of debt such as a mortgage, car loan, personal loan and credit card balances will positively affect your credit rating once there are no late payments or non-payments on record. The fact that you can manage a range of credit successfully demonstrates that you are a responsible borrower. Again, this assessment is made objectively. The facts are that you have undertaken a range of loans and they are all well serviced.
Carrying such a range of debt will only affect your credit rating negatively if you demonstrate negative credit behaviour on any of those loans or credit lines like late payments or non-payment.
Your credit rating is therefore one of your most valuable assets in your personal financial plan. This is because banks and other lending institutions, employers, insurance companies, retailers and any business who may consider extending you credit, may have access to your credit rating. Before they may have even met you in person, they will have a wealth of information about your repayment behaviour; your propensity to tender cheques that will bounce or to skip out on a landlord or other creditor without settling outstanding debts; as well as the details of any registered debt which you hold.
To know that so much information about you is available to others may shock you into taking an important step if you have never done so before: that is, seeking to see what is your credit rating and correcting any obvious errors. You will only have a credit rating, though, if you have already established credit at some time in the past. You establish credit by, for example, taking a loan, using a line of credit or using a credit card.
Once you have established credit, credit bureaus operating in the area will keep track of your creditworthiness. The Caribbean Credit Bureau Ltd operates in Barbados as Credi-Check from Christ Church offices. To access your personal credit rating, you can visit its office with suitable identification documents and seek to know your credit information according to its files.
Mark in your mind indelibly that a good credit rating is very valuable. A good credit rating can likely mean lower interest on your mortgage or car loan, receiving credit card offers’ better job offers, and lower insurance premium rates, for example. A good score lowers your cost.
• Louise Fairsave is a personal financial management adviser, providing practical advice on money and estate matters. Her advice is general in nature; readers should seek advice about their specific circumstances. This column is sponsored by the Barbados Workers’ Union Co-op Credit Union Ltd.