Sunday, November 12, 2006

Simply Asking May Hurt Your Credit

Since I moved in with my fiancé this past spring, I entered in three large transactions (bought an engagement ring, bout my first car, bought a house), all of which impacted my credit. They taught me a great deal about my credit score, and frankly, made me question the methods used to calculate ones credit score. Hopefully over the next few paragraphs I can impart one piece of credit wisdom I learned since the spring.

In the fall of last year, while on the phone with my bank, I was offered a line of credit. I was planning to propose to my girlfriend over the next few months, and figured it wouldn’t be a bad idea. I asked what the rate would be if I were to open my line of credit. The rate I was quoted was prime +2%. This was at least 1% more than I was willing to pay. So I declined. This was my first mistake. By asking for the rate, I had essentially applied for the line of credit. This was despite the fact that they offered it, and I was only asking for the rate. I mean really, if somebody says “do you want to buy this?” and you say “how much?”, Did you really apply for anything? We will get to why this matters in a minute.

Fast-forward to the spring of this year. I’ve decided to propose to my long-time girlfriend and knew that once we moved in together, we would need a car. I figured this would be a good time to open up a line of credit. So, this time I call my bank and tell them I would now like sign up again for a line of credit. After a few minutes of waiting on hold, I’m told that the bank was not willing to extend any credit to me at that time.

I was shocked. They had pre-approved me just a few months earlier and there was nothing else that would have hurt my credit. So I contacted Equifax and asked why this would be. After getting the runaround for several phone calls, I was finally informed that my credit score was low because of the number of credit requests I had made in the past two years. WHAT???? "Your credit score was lowered because your credit was access several times over the last two years". You cant be serious? So when I asked for the rate on that line of credit in the fall, I was hurting my credit. In the fall I had also closed a student credit card and opened a new credit card with a much better rate (prime +1). This apparently also damaged my credit score. To top it off, when I moved to Toronto to start my current job, the apartment I moved into also ran a credit check…again, hurting my credit.

I think this methodology is extremely unfair to those starting out in life. Of course you will need to have a number of credit checks/open new credit once you finish school and start your life as an adult. You credit report is already adversely affected by having “young credit”, why make it a double whammy by hurting you for starting your life?

So here is the moral of the story, think twice before giving somebody your SIN unless you are absolutely applying for credit. It hurts your credit score and may not do you any good.

Until next time,

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