How to Play the Credit Game, with Richard Moxley
Welcome to The MapleMoney Show, the podcast that helps Canadians improve their personal finances to create lasting financial freedom. I’m your host, Tom Drake, the founder of MapleMoney, where I’ve been writing about all things related to personal finance since 2009.
Did you know that closing a credit card can actually hurt your credit score? Or that your bank may not be reporting your credit information to both of Canada’s credit bureaus? In this episode, I’m joined by Richard Moxley, credit expert and author of the book, The Credit Game. Richard explains why it’s so important to monitor your credit on a regular basis, and he also busts a few credit score myths along the way.
According to Richard, your credit score is not a reliable indicator of your credit strength, for a few reasons. For starters, there are actually two credit bureaus in Canada, Equifax and TransUnion, and the credit scores produced by each one can vary. In fact, your bank may not be reporting your repayment details to both bureaus, leading to inaccuracies in the data.
Richard explains the four types of loans that are reported to the bureau, including the difference between revolving, installment, and open loans. And, if you’re wondering how late is too late when it comes to making payments, well, Richard has an answer for that, too. If you’re looking for tips on how to build strong credit, this episode is definitely for you.
Our sponsor, Borrowell, is on a mission is to help Canadians feel great about their credit. To do it, they’ve taken a product that was once $23/month, and made it completely free. To get a copy of your free credit score, credit report, as well as ongoing monitoring every month, visit Borrowell today.
- Not all lenders report to both Equifax and TransUnion
- Credit scores are not a reliable indicator of credit strength
- Banks use their own methods to measure your creditworthiness
- You don’t need to maintain debt to build good credit
- Can raising your credit limits increase your credit score?
- Did you know? Closing a credit product can actually hurt your score
- The difference between revolving and installment credit accounts
- Your bank has internal data that’s not reported to the bureau
Did you know that closing credit card can actually hurt your credit score or that your bank may not be reporting your credit information to both of Canada’s credit bureaus? In this episode, I’m joined by Richard Moxley, credit expert and author of the book, The Credit Game. Richard explains why it’s so important to monitor credit on a regular basis. He also busts a few credit score myths along the way.
Welcome to the Maple Money Show, the podcast that helps Canadians improves their personal finances to create lasting financial freedom. Our sponsor, Borrowell, is on a mission help Canadians feel great about their credit. To do it they’ve taken a product that was once $23 a month and made it completely free. To get a copy of your free credit score, credit report, as well as ongoing monitoring every month, head over to maplemoney.com/borrowell today. Now, it’s time to discuss credit scores with Richard.
Tom: Hi, Richard, welcome to Maple Money Show.
Richard: Hi. Thanks.
Tom: You recently wrote a book called, The Credit Game – Rules Every Canadian Must Know to Win. You sent me a copy so I went through it. One of the questions kind of nagging at me this month was, CBC Marketplace recently did the story about how two different credit bureaus had different scores and the providers who offer these credit scores also have different scores. I was wondering if we could just start with why are there two bureaus and why is the information different?
Richard: It’s a very common question and is a great question, because our society has become so obsessed with score that it’s hard to actually know if you’re determining how your credit is with the score. It’s hard to know exactly if you have good credit or not with the scores being so different. So the score is misleading in many ways. There are differences between Equifax and TransUnion. Different companies have slightly different things they focus on in their scoring system or algorithm. However, the main reason you’re going to see big differences between Equifax and TransUnion is that not all banks and lenders actually report to both Equifax and TransUnion. You can have a collection on one and not the other. And obviously, a collection is going to drop your score if it’s showing up on one and not the other. And that’s one of the big reasons you’re going to see differences between the two.
Tom: Do banks use both credit scores? Or if you’re at TD bank and use this one score, that’s the same company you pull from?
Richard: Yeah. And that’s another reason why I’m not a big fan of focusing so much on the score or using the score to determine how your credit is doing. Whether you go directly with Equifax or TransUnion or if you get it from one of the third party providers, these are what they call educational scores or consumer scores. The banks and lenders have their own specific scoring system, internally. For example, TD will focus primarily with Equifax. So they will pull an Equifax report. Then what happens is they take the information and put it through their own system and analyze it their own way. So you could get approved with TD and if you went to RBC or even another bank that uses Equifax, you could get declined just because they have different ways of looking at it. The scoring system can be different. It could be a number. It could be approved or declined. Or maybe it’s just a letter. However, that the company decides to do that.
Tom: You know, I seem to remember that a long time ago before I really got into all this personal finance stuff is money stuff, I was at RBC and I think they actually gave me a letter score. I don’t remember if it was like a report card with A to F, that kind of thing.
Richard: They still use that system.
Tom: Oh, okay. Yeah, it makes sense. These companies don’t need to be stuck to some three digit score. They have this information. They can decide what’s important to them. They’re the ones lending the money. So I get that they can decide what’s more important. Maybe you’ve paid all your bills on time or most of the time but you got this one collection so different banks might have different opinions.
Richard: Yes, they do.
Tom: Why do third party providers have different scores? Just going back to the CBC thing, in website terms I’m used to this idea of caching. You save something at a certain time. Maybe it’s just that? That they’re getting last week’s score or something like that?
Richard: That actually is a great example. Equifax, TransUnion and even Borrowell or Credit Karma, whoever it is, they are taking snapshots. And a lot of times they only provide it monthly so you will see differences. Let’s say you had an RBC account that updated with your credit report, but then you’re looking technically at last month’s report with Borrowell or one of the other guys, that’s one of the reasons you’re going to see differences between the two.
Tom: That makes sense. They can’t constantly be pulling that information. I had a boss at work one time who would say it’s directionally correct. It’s the idea that if you’re getting your credit score, technically, you can look at anytime. But if you’re looking at it monthly, you can still tell if you’re headed in the right direction.
Tom: Speaking of looking at it monthly and heading in the right direction, one thing I’m guilty of is this idea of chasing your credit score. At times, and even recently, I’ve been a little obsessed about making sure my score is constantly going up. Is there a point where that becomes meaningless? Or is it maybe more about the bands being excellent compared to poor?
Richard: The big message in the book is the score in itself is not what you should be focusing on. Now I get it. It’s fun to watch the score go up and down and trying to kind of use that as a way to determine if you’re on the right direction or not. But in my opinion, if I could have it my way, which doesn’t happen much with five kids, what these reports are really good for is making sure all the information is correct. With all the fraud and errors that are out there, what I love about these free services (whether you’re paying for it or not) is just the ability to go in and actually see that everything is correct. The score, we’ve already talked about can be very misleading so we can drop, let’s say, 60 points. However, that same drop will probably not show up with the banks and lenders. I don’t like chasing the score and I don’t like people emphasizing on the score because of that. They get freaked out and think they’re doing the wrong thing when they’re actually doing the right thing. It’s just the scoring system they happen to be looking at is measuring something differently than what the banks and lenders would actually care about. That’s what I don’t like about the score. But once you get to that 700 range on the score, your score, whether you have an 800 or 750, there’s really not much more that you really want to do. Just keep on focusing on the rules of the game as opposed to obsessing about the score.
Tom: And what is the score range? I sometimes get stuck online when American things start to sneak into it. They have two different ranges. So what is the Canadian credit score?
Richard: Well, what’s nice about Canada is we only have Equifax and TransUnion. So any websites you see like Experian or something else, you can just ignore that because it’s probably misleading information. But another thing that’s nice about the Canadian scoring system is that both Equifax and TransUnion have 300 to 900. Some people say they have a zero credit score. And technically, yeah, is. You either don’t have a credit score or you have a score between 300 and 900.
Tom: Is it possible to actually get a perfect 900 or do I need to stop trying?
Richard: Well, I would say you probably have more important things to do than trying to get to the 900, although it is fun to try and get there. I have seen a 900. It’s one of those things where, obviously, they did have great credit. I reference an example in my book, The Credit Game where I talk about this woman who had an 896. She could have done a couple other things to get to 900 but, obviously, life is way more important in pretty any other aspect. There’s literally no difference for her in her life between an 896 and 900, other than breaking purposes, of course.
Tom: Exactly. I would love to have had that screenshot.
Richard: Yeah, take that screenshot quick and move on with life.
Tom: Even with a score like that, again, if the banks aren’t really using that score and they’re just using the information in their scoring system, it still isn’t going to be the same anyways, right?
Richard: Exactly. The message of the book is, play to win the credit game. This is, essentially, not being restricted or embarrassed at any time and always qualifying for best rates. I check my credit regularly but I don’t really know what my score is. I don’t really care because it’s always over that 700 marker. I never get declined because of the credit.
Tom: I should remind people this episode is actually sponsored by Borrowell. But you’re not here with them. I think Borrowell and Credit Karma are great options because each one gives you a different score from different bureaus as well as a report. I think other options out there that don’t give you the report aren’t helping much because the score isn’t everything. It’s more about going through the report and finding the details?
Richard: It’s kind of the daunting task because they don’t necessarily make the credit report easy to understand. That’s one of the things that I focus on when I’m working with clients. Their first comment is, “I have a 563,” and I tell them that’s great. I can’t tell you how to improve your credit until I see it. So whenever I work with clients or talk to people, I always tell them to get a copy of their credit and go through it line-by-line. I know it can be daunting. But if you break it down it’s a lot easier. It just takes some practice like anything else.
Tom: For sure. There was a time way back in the day… And I’m dating myself a bit here, but I used to fax in to get my credit report. You could fax your information once a year and they would mail you out the credit report. I found that really hard to look at because there was nothing explaining the different types of credit and everything like that. There was just these codes on them. I can’t remember but was it R0 or something like that?
Richard: Yes, it’s R1 to R9. Actually, when I review someone’s credit report, those are the kind of things I really like to see. I really like seeing the free credit report. Even with Equifax and TransUnion you still have to submit it by fax or by mail. They haven’t quite caught up with modern technology. That’s one thing you can still do if you don’t necessarily want to sign up with a third party or pay for it directly with Equifax and TransUnion.
Tom: Yeah, for you, I get it because you want to see that that raw data as much as possible. What I like about these third parties is they kind of simplify that a bit. They start spelling it out for you. It makes it a little more human, more understandable than that raw credit report.
Richard: They do it on purpose to you to try and help the consumer because that’s what they’re trying to do, to get people to understand their credit. That’s the service they’re providing.
Tom: Let’s go into some of the things about how you can handle this information. What are things that are affecting your credit score and your credit report? Right off the bat, I’m thinking late payments or no payments? They’re probably pretty high up the list?
Richard: Yes, they are. When I first wrote my first book on credit, people said, “Oh, that’s great. I have great credit because I pay my bills on time.” That’s definitely a great start. But it’s kind of like wearing pants. It’s a great start but there are other things that are very important that also control the score as well.
Tom: What about this idea of balance ratio? I’m no expert on this but I’ve heard this idea that you don’t want to have zero credit but you don’t want to have 100 percent in use either. Is there sort of a sweet spot people should be aiming for? And is it really worth holding debt or can you still be paying it off every month?
Richard: That’s one of the things that is a huge myth out there. I don’t know who started the myth. It was probably the credit card companies. But I won’t point to any conspiracy theories today. As far as what you can do when it comes to credit cards or lines of credit, any revolving type of credit, a zero balance is great. So you don’t have to maintain debt in order to have good credit. I think where this started to really flourish as far as a myth is concerned is that people would say you have to have loans, mortgages or cell phone—that kind of debt. And it is true that a closed mortgage or closed loan no longer builds your credit at all. So technically, if you’re going to use those types of credit to build or maintain your credit, you have to actually have debt in order to have good credit. I did a lot of research on and studied thousands of reports and, essentially, you don’t have to have a mortgage, loan or a cell phone in order to have good credit. You don’t have to have those types of credit if you don’t want to.
Tom: Okay. Let’s look at the other side of that. Is there a certain ratio of credit usage that starts to become a problem? I’ve heard—and maybe this is another myth but if you if you get your limit increased that’s going to improve your ratio and your score. Is this a real thing?
Richard: Actually, it is. And one of the reasons I wrote the book was because there is theory and then there’s real life. And real life has a way of destroying theory really quickly. To understand this—and this is something I go into in detail on in the book, essentially, when it comes to increasing your credit limits this is a great way to jump the score. So if you maintain, let’s say, a $5,000 continual balance, not necessarily that you’re keeping a balance, but you use about $5,000 a month regularly on your credit card. If you have a limit of $5,000 on your credit card, this is going to be disastrous for your credit score. It’s something you don’t want to do. However, if you were to increase the limit to $10,000, then all of sudden that same balance usage that you’re utilizing now becomes okay. Now, it’s not lowering the score and you can have great credit and still maintain the same spending habits that you have.
Tom: So it is kind of a percentage-based thing and not always just about the dollars. Because in your example, you still have $5,000 in debt.
Richard: Exactly. Yes. Whether it’s $500 or $10,000, Equifax and TransUnion don’t really care about the actual balance. They’re more interested in the balance versus the limit. So it is very much the percentage that they want to focus on.
Tom: This is probably where the banks start to look a little different, too, because they’re looking at how much total debt you have and if you can you afford this mortgage. It becomes a different thing than just a percent.
Richard: And one of the things banks do when you go and apply for a mortgage or some type of credit is they will generally max out your limits. So if you have a $10,000 limit, they’re not taking your $5,000 monthly payment and doing that as far as their debt servicing or your income versus your debt. They’re actually maxing it out in their system. In their system they see it as $10,000 of debt even though you may have a zero balance on it. They max it out because, technically, the next day you could actually go and spend all that money. And being more conservative, they’ll show it as if it is maxed out.
Tom: I never thought of that, but I realize it now. When I got a mortgage, they made me close a credit line down to make the numbers work. Basically, they were saying, “You can’t have this because you’re also going to have this line of credit within your mortgage.” I got one of the Scotia “Step” mortgages. They told me I had to close the other line of credit to make the numbers work. So, yeah, I guess I’ve seen that personally, but I didn’t really understand where they were going with that.
Richard: They do like to close down competitor’s accounts, of course. But that’s something that I do cover in the book, as well as why you want to be careful about doing that. It can actually really hurt your credit by closing down an account.
Tom: We’ve talked about the one-to-nine rating. Can you go through the different types of credit that someone might see on their credit report and what that one-to-nine range really means? How bad does it have to be?
Richard: The different types of credit are really categorized by revolving credit which is a credit card or line of credit. Essentially, it’s anything that you can use and pay off as you wish. A loan or installment type of accounts—mortgages and open accounts like a cell phone, those are the four main accounts that are out there. When it comes to the one-to-nine, to be honest, I tell everyone to just forget about that because it’s confusing on what it really means. Essentially, if you’re one day late on a payment, if you’re in that 30 day late category, that’s bad. The longer you have it, the worse the rating is and the worse it is for your credit. I try not to get people bogged down into the nitty-gritty details of it’s just because people don’t find credit as exciting as I do. It’s something where I try not to put people to sleep on this stuff. But essentially, if you are paying your bills on time, you’ll have a one rating. If you don’t, then you’ll have a two or three or whatever.
Tom: It’s just different degrees of getting further and further behind.
Richard: I think people understand that concept as opposed to having a seven or nine. Banks and lenders don’t really care. You’re not living up to your original agreement so you’re not going to get the best rates and best terms going forward. If you have a one, then you’re on the right track.
Tom: I think I’ve admitted it on this podcast. If not, I will now. I missed a payment one time not too long ago. Maybe a year or so. It’s just bad organization but it didn’t affect my score at all in my report. It’s still stayed as a one. Is that sort of that 30-day window or was I just lucky that they didn’t report it? What happens in that case?
Richard: It has to do with luck because a lot of people say, “I didn’t miss the payment. I was just late.” If you’re late and they report it to Equifax and TransUnion, then it will show up and lower your score. And seeing as we’re confessing credit in the past year, when I went to RBC, my rating was actually much lower than what I had on my TransUnion report because I pulled my report before I went into RBC as I always do. And they said, “Well, actually, it’s not that good because you’ve been late on a couple of payments.” And I said, “I don’t see it on my credit report at all.” And they said that it was internally on their scoring system. That’s one of the things— on the internal score they can see if you’re one day late. I think it happened three times where it was only one day late, that kind of thing. Or I paid it from my TD account or different bank account and it just didn’t arrive on time. That was lowering my internal credit score with the lending institution. But if I had gone to a different lending institution, they would never see it.
Tom: Exactly. Yeah, that’s a great point, because I guess when you’re a bank, your own internal data is going to trump anything in a report. They know everything when it comes to that one bank. Why wouldn’t they use their own data and not rely on these other guys?
Richard: Yeah, it’s all tracked.
Tom: One thing I noticed you mentioned your book was this idea of joint credit. I wonder if we could go into that a bit? When I think joint credit, the thing that comes to my mind most is a mortgage. My wife and I are on our mortgage and I assume that’s pretty common. How does that affect both of our credit scores and reports? And what else is in play here when it comes to joint credit?
Richard: Joint credit can be very scary and people don’t realize how much it can mess up your credit. Really, when it comes to mortgages a lot of risk is mitigated because of the fact that it’s a principal and interest loan, essentially. You can’t go and rack it up without re-qualifying. Now, if you were on a HELOC (Home Equity Line Of Credit) there is more risk there because they can access that money and use it for whatever, then you’re stuck with the bill if that happens. But even with a HELOC you’re still protected on the fact that if you get past that certain limit, you have to re-qualify for any additional and that takes two. So, if you’re joint on their application, you both have to apply to get any additional credit above and beyond what you’re already on the hook for. That’s one thing where you’re protected with a mortgage or a line of credit. The other thing is that you can’t run off with the mortgage. With a vehicle, if you’re joint with someone else, like your wife, partner—whoever it is, if they take off, you’re essentially stuck with that and you have no asset to sell or get rid of. Someone could take it and you’re stuck with 100 percent of that. And that’s not really theft so it’s not covered under insurance. It just sucks. And with credit cards, what I really dislike about joint credit cards is the fact that if your joint with your spouse and something goes wrong, whether it’s fraud, separation or divorce, essentially, they could increase the limit whenever they want. I’ve had some couples that started with a $1,000 limit, which in a divorce is not really that big of a deal to take care of. If you have to pay 100 percent of it to close it, that’s fine. But they may have been increasing the limit without you even knowing. All of a sudden it could be a $10,000 limit, which is a little harder to swallow when you didn’t spend any of that money and now you’re separated and they’re gone. You’re stuck with the bill for doing that.
Tom: Can you have two people on a credit card? I know there’s supplemental cards, but that’s not quite the same, right?
Richard: No. It’s different. That’s okay because whatever happens on the supplemental or the co-applicant card just affects the main applicant. The good thing about that is the main applicant can shut it down or close it at any time and the co-applicant or supplementary cardholder can’t increase the limit without the main applicant’s permission. There’s some protection there. You can have a joint credit card. If you have that you have to be willing to pay 100 percent of the balance and maintain the minimum payment in order to go forward. It doesn’t matter who spent the money or who did what with what. If you put your name on there, you’re 100 percent responsible for the debt.
Tom: So both people are really 100 percent responsible? It’s not like you can pay back 50 percent and they’ll go after the other person.
Richard: Exactly. It’s one of those things where it’s 100 percent and the bank will continue to chase you even if there’s a bankruptcy or some kind of insolvency or debt program that’s involved. The other person is then stuck with 100 percent of the debt. It’s one of those things where you just want to know what you’re getting into before you do it. And then I can say I told you so.
Tom: I assume co-signing comes under here, too. When I was in my late teens I wanted my parents to co-sign for a car loan. And they said, “No, we’re not doing that. We can’t do that.” I get that now. With co-signing, they’re basically taking on all the risk potentially, right?
Richard: Exactly. If you miss one late payment, it will affect your credit and their credit. That is something that I don’t suggest. It’s one those things where you can get a secure credit card for your son or daughter to get their credit better established. Get their name on the debt because it really sucks when that one account (because of a couple late payments) is now stopping you from qualifying for a mortgage or something that is really important in your life.
Tom: Of course, as a later teen, I wasn’t thinking of this at all. I said, “All you have got to do is sign this piece of paper and I can get a loan. Don’t you trust me? I’m your son.”
Richard: It’s not even about the son or daughter because if they get in a relationship and something happens, then all of a sudden it ties you into it. Once again, insolvency or debt programs can then tie you back into having this issue where it’s included in the debt program. But now technically, your parents have to pay 100 percent of the debt still. There’s a number of reasons and risks involved that I go through in the book. If you’re okay with those risks and you want to proceed, then go for it. But I just want to make sure people understand that risk before they put their name on it.
Tom: The last thing I can think of when it comes to making the most of your credit report and credit score is closing an account. Does that hurt your score or is it sometimes just worth it because of the admin hassle of having too many accounts? Or a credit card with an annual fee? I would think that would kind of outweigh any credit score potentially. But does closing an account actually hurt? Does this go back to the ratio thing?
Richard: Actually, this is a huge factor in credit and it happens quite often. When I was a mortgage broker with people coming in, unfortunately, some people would get declined or charged higher rates just because they had closed or paid off some kind of account previously thinking it would be a good thing on their credit. But in reality, the longer you’ve had a credit account, the better it is for your credit. If you go and close it, then it takes that good, current history and puts it into a different category (which is good, old information) that stays on your credit report for six years or seven years depending on the province. But essentially, it doesn’t build your score at all. The scoring system or algorithm is going to look at what else is current and rely on that. So where it comes into a lot of problems is if you only have one credit card or a couple loans and you close or pay off those specific accounts. That can drop your score over 100 points just by closing it or paying it off. What you want to do is have a number of established accounts. Then if you are going to close (because of an annual fee or whatever the reason is) just make sure you have two other well-established accounts that are buffering that drop. And just don’t do it before you go and apply for a mortgage or something really important because you’re score will drop and it will take some time before you get your score up.
Tom: Yeah, that makes sense. And it’s something I actually did a long, long time ago. I had a student loan from the 90s I could’ve easily paid off. I was just down the last little bit. But we were about to get a mortgage and one of the things I did was call them. They’ve got a debt relief thing where I think they minimized my payments down to $25 a month or something like that. It wasn’t that I couldn’t pay off that last $1,000 or whatever it was. I knew enough then that I wanted to keep my only source of past credit going before looking at a mortgage. I didn’t even have a credit card at one point. It was just this student loan from ’97 and into the later 2000s. Once those are paid they’re just kind of done and you don’t get credit, right?
Richard: They’re old news.
Tom: Well, it’s been great. I think we’ve given people a lot of information where they can get those credit reports and credit scores and start looking at them and working with them to improve it to get those better mortgage rates and all that. Can you let people know where they can find you online and let them know about the book?
Richard: The best place is creditgame.net. That’s my website. It has links to all the social media and places where you can buy the book online with Amazon, the e-book, audio book, and all that fun stuff. So creditgame.net is the website.
Tom: Perfect. Thanks for being on the show.
Richard: You bet. Thanks.
Thank you, Richard, for explaining how we can win at the credit game and why there’s a lot more to having a good credit score than the score itself. You’ll find the show notes for this episode at maplemoney.com/richardmoxley. I hope you’ve been enjoying the content here on the podcast. I’m always interested to know what topics you want to hear more about. Feel free to reach out to me via email at [email protected] with topic suggestions or guests you think I should have on the show. Thank you for listening and I’ll see you next week when Clint Proctor joins us to explain how he turned to side-hustle into a full time job in less than 12 months. See you next week.