Financial institutions like banks require good credit ratings of applicants for the approval of credit applications. Credit bureaus like: Equifax of Canada and Trans Union Credit are sources of credit information.
Many people think they can easily get a loan if their credit ratings are good - that is they are up to date on payments of bills.
You may have ten or more loans and credit cards and you are all up to date on your payments. However, your good credit record does not guarantee you of getting a loan.
For a secure loan, financial institutions would look at the three Cs of credit namely: Capacity to pay, Collateral and good Credit rating. Meaning, credit rating is only one of the requirements. If you have a good credit rating, but you do not have the capacity to pay for your income is not stable or below the minimum requirement, your application for credit would be rejected.
Furthermore, even if you have a good credit rating and stable income but you do not have a property as collateral with sufficient value or equity, your application for credit would still be rejected for you do not meet the required three Cs of credit.
On unsecure loan, however, like credit card, personal loan or line of credit, only two Cs are required: Capacity to pay (stable and sufficient income) and good Credit rating. You have to meet all two requirements to get a loan.
Because of false belief that good credit rating guarantees a loan, many people who are loaded with debts - already max out their credit card and line of credits are trying hard to meet both ends to pay their bills on time just to maintain their good credit rating. Others are even juggling their payments - taking money from one credit card to pay the others and vice versa.
People doing this are just waiting for the investable - financial disaster, for sooner or later their credit cards and line of credits would be cancelled for juggling payments would not reduce debts, in fact, it only increases debts because of exorbitant interest rates. Once cancelled, collection agents would hound them, then court summons to follow and garnishment of wages.
If you are in that kind of situation, why prolong the financial pain when you have several options to solve your financial problems when you are unable to pay your debts without borrowing or juggling payments?
Maintaining good credit rating at all cost is not a wise move for it does not serve you any good at all. Good credit rating alone does not guarantee you of getting a loan.
Adam Aspilla is a Senior Financial Counselor of the Debt Clinic of Canada Inc. and the author of the book, You Can Negotiate All Your Debts. He also writes a biweekly column, “What Matters In Life” in “Taliba Newspaper. For free initial, professional and confidential consultation, please call 905-306-7572.