Maintaining good credit score means using credit products

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Dear Money Lady:

I am a retired banking executive who owns my home clear title and have no consumer debt. I always pay my bills in full on time before the due dates.

Equifax recently contacted me saying my credit score dropped 32 points. After pushing the agent three to four times by saying I would like to know the specifics of why my score dropped, I was given the following answer. I arranged a $75,000 unsecured line of credit with BNS several years ago to provide an emergency cash facility should I ever need it. I have never withdrawn a nickel from the account. I was told because the account has been dormant and never used it caused my credit score to be negatively impacted!

This seems very wrong on many levels. I thought the fact I have never used the line should make me a better and not reduced credit risk.

Marvin

Marvin, thank you for sharing your experience with others.

As an advisor, I would say you did all the right things. It was an excellent idea to secure a line of credit to use in the event of a future emergency. I would say great planning. But as you now know, the credit bureaus (Equifax and TransCanada Union) that rate consumers monthly look at it another way.

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Unfortunately, leaving a credit product open but allowing it to become inactive or dormant is the same as being late or delinquent. I know many of you may think this sound unreasonable, but it happens all the time to very good consumers. I have seen this a lot with department store cards that are opened for shoppers to get an instant discount on their purchases, only to receive a credit card in the mail, not activate it or use it and then it becomes inactive. This then drops their score and effects their credit worthiness for the future when they are applying for credit.

Car leases are another one that can drop your score. When your sales rep calls you to upgrade your lease and get you into a new vehicle for the same monthly payment – many people think this is a great deal – and it may be.

The problem is that the old car lease, because it has not been officially paid out and closed, but rather transferred to a new lease and a new vehicle, the old lease stays on your credit. So now it looks like you have two car leases when you only have one.

I once pulled a credit bureau on a client that was getting a collateral charge at a major bank and he was turned down repeatedly due to this problem. He had upgraded his vehicle many times and it looked like he had six car leases when he really only had one. Of course, we fixed the problem by going back to the car dealer and having them close the leases properly, but for many people, they don’t even know this is happening to their credit.

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In Marvin’s case, he suggested closing his line of credit, which I am sure you will agree is not a good thing to do just because your score may have dropped a little.

Instead, you should review the credit you have (credit cards, lines or loans) and use it – even annually.

Withdraw funds from your credit line or buy something with your credit card and then pay it back the next day, just to keep it active and in good standing. Do not let your credit rating drop because you are thinking you shouldn’t use your products. Inactivity or dormancy for a long period of time may prompt your bank to close the facility and often times it may be harder to apply for it later because the qualifying requirements and rates have changed.

Good financial planning doesn’t mean you just set things up and then forget about them – even though I know we all have better things to do. Please just use the credit you have periodically. Keep a watchful eye on how creditors use your SIN and be mindful of automatic approvals for special offers and incentives.

Banks will need to ask for your SIN when you open accounts or apply for credit, but other organizations may not legally require it. Be careful when giving out your number and make sure you ask what it is being used for. It is after all your credit, your number and your right to protect yourself.

Good Luck & Best Wishes

Christine Ibbotson

Written by Christine Ibbotson, author of three finance books and the Canadian best-seller, “How to Retire Debt Free & Wealthy”. For more information, go to www.askthemoneylady.ca or send a question to info@askthemoneylady.ca

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