Cash is King, Until You Need Credit. Welcome to the first Credit Tip Tuesday of 2021. Today we are talking about something that many people don't know about; why credit inactivity can be as bad as a late payment.
Have you ever met that one person who hates using their credit card, or says “if you can’t buy it with cash you shouldn’t be buying it at all”. Well, those people are generally right, until you want to buy something truly worth buying.
During the course of your life there are few purchases that will stand the test of time as a house, a new car or university education. Some people have the average cost of a house sitting in their savings account. For the rest of us we will need to apply and be approved for a mortgage. The average house in Canada is now $531,000, the price tag almost triples to 1.3 million, if you are looking for a house in Vancouver.
So why oh why would credit inactivity be so bad, if all your payments are up to date and you use credit only when needed?
The answer is obvious. If you haven’t used credit in a while, credit reporting agencies have no way of understanding your current behaviour with credit. This inactivity makes it difficult to continue to calculate your credit score and with less and less data available, your score goes down much like it would with a late payment. In both cases it could take months to rebuild your credit score and in the meantime you may face higher borrowing rates or you may even be declined credit altogether.
So, the question now becomes how long is too long without using your credit?
From everything I have been able to research I wouldn’t go longer than 12 consecutive months with no activity. This isn’t an excuse to go shopping every month, but it does mean you should be intentional about putting some of your “Cash” purchases on your credit card and paying off your credit card by the due date. This will ensure that your credit report stays healthy and active. Your lenders will report the activity regularly and you will be able to maintain your good credit. A healthy and active credit report will help ensure when the day comes that you want to purchase the house of your dreams, your experience, when you apply for a mortgage, will not turn into a nightmare.
Disclaimer: The content provided on the Plastk Financial Inc. Blog is information to help Canadians become financially literate and learn about credit. Plastk is not responsible for building or ruining an individual's credit score or credit rating. It is neither tax nor legal advice, is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Tax, investment, credit inquiries, and all other decisions should be made, as appropriate, only with guidance from a qualified professional.