Road to Better Credit: Avoid applying for too much credit
Welcome back to the Road to Better Credit. In this post, the second of a four-part series, we’ll help you avoid the pitfalls of submitting multiple credit applications at the same time. We’ll also provide you with a solution to help establish a credit history, without damaging your score.
As we learned in part one of our “Road to Better Credit” series, one of the factors that can affect your credit score is a lack of established credit. Admittedly, this is not necessarily your fault. Still, without a track record of successfully managing credit, it is difficult for a lender to make an informed decision about your ability to manage debt.
This might lead one to believe that to improve their credit score, it would be wise to amass as much credit as possible in a short time. However, these credit-seeking actions can actually do more harm than good.
Applying for credit
According to Equifax Canada, one of the country’s two credit bureaus, applications for loans and credit cards are recorded on your credit reports as a “hard inquiry” and may appear on your credit report for up to three years. When trying to get the best rate on a mortgage, several inquiries are to be expected, and that’s why home loan inquiries within a short time period are generally grouped together as a single inquiry.
It is important to note that this exemption does not apply to inquiries for credit cards and other tradelines like department store cards. Another Equifax article suggests that hard inquiries can indicate credit-seeking behaviour, which is often an indicator of financial distress. It can be difficult to obtain credit without a reliable history, but it’s also difficult to build a reliable history without credit.
Those hoping to build their credit history should be relieved to learn that there are ways to accomplish this without taking a chance at increasing the number of hard inquiries on their credit report.
Ways to establish credit
When trying to establish a credit history, applying for a traditional credit card can be risky. If the application is declined, you’ll have to try again with another card, thus creating multiple hard inquiries on your credit report. One way to avoid this is to get what is called a secured credit card.
With a secured card, you provide a deposit and receive a credit card with a spending limit in the amount of that deposit. It will still generate an inquiry on your credit report, but because the card is secured by a deposit, most applications are approved, thus reducing the number of inquiries generated. As you use your card to make purchases and make your regular, on-time monthly payments, this payment history is reflected on your credit report to help you build up a history that will allow you to access more credit later on.
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