I’m impressed with how people have raised their game over the years in understanding the important of credit scores. But I still see cases where people put a greater priority on maintaining their score than they do on sound personal finance.
What’s best for your finances isn’t always optimum for your credit score. This point was highlighted when I consulted a credit expert to answer the following question from a reader: “Would paying off my only installment loan early hurt my hurt credit score? I want to save a couple of thousand in interest -- would the effect of saving the interest be better than the credit score offset?”
The answer from Julie Kuzmic, director of consumer advocacy at Equifax Canada, is that paying off a loan early does not, all by itself, affect a credit score. “There isn’t an aspect in the algorithms that says ‘extra points for paying something off early,’ or the reverse.”
Where paying off the loan could come into play is in how it affects:
- the number of open accounts
- the average age of open accounts
- the type of open accounts (installment loans versus lines of credit)
- balance owing on open accounts
“Some people might see a score change when reducing the number of open accounts while others may not,” Ms. Kuzmic said. “The change could be positive or negative, depending on the other information in the credit file.”
The single biggest factor in credit score calculations: Paying bills on time, Ms. Kuzmic said.
To answer this reader’s question, it’s possible that paying off the loan could have a positive or negative effect on his credit score – it depends on what else is in his credit history. Whatever the impact, it’s of secondary importance to the benefit of paying off the loan and saving, to quote this reader, “a couple of thousand in interest.”
Join us on Wednesday June 24th at 1 pm EST for an Instagram Live Q&A
Real estate is always a hot topic, but the pandemic that devastated Canada’s economy and job market has added an extra layer of stress around our housing situations. Join personal finance editor Roma Luciw and myself on Instagram as we answer your housing questions.
And in this week’s episode of our Stress Test podcast, Roma and I look at Canada’s obsession with home ownership. We hear from a millennial who bought a condo right before the coronavirus struck. Plus, I talk with John Pasalis, the founder of a real estate brokerage, about home-buying and renting concerns.
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Rob’s personal finance reading list…
Recent mortgage developments and the variable-vs-fixed rate debate
Fixed and variable rates are below 2 per cent – how does this affect the question of whether or not to go for the security of a fixed-rate mortgage?
Everything you ever wanted to know about CERB
The Canada Emergency Response Benefit was recently extended for two more months. A publication for advisers looks at who’s eligible for CERB, how it’s taxed, how it works in conjunction with Employment Insurance and what happens when recipients return to work.
A guide to buying masks for grocery shopping
This is a U.S. guide, but there’s some good info about what to look for in a mask suitable for wearing in supermarkets and other places where you can’t maintain a buffer between you and others.
Asset allocation, the sequel
In the investing biz, asset allocation is the term used to describe the mixing of stocks, bonds and cash in portfolios to provide diversification. Now for a lesson on asset location – do different types of assets belong in different accounts?
Ask Rob
Q: Nervous about a much anticipated second COVID wave with consequent market crash, but not wanting to convert my beloved portfolio to cash at current prices, I've placed trailing stop orders with all my holdings. What do you think of this strategy?
A: First, here’s a definition of trailing stop orders. Using them in this situation sounds like an attempt at market timing, which means trying to anticipate a good time to exit the market. What if stocks bounce back the day after your sell order goes through? How will you figure out the best time to buy back into the market? If your portfolio is well diversified and you have a long-term horizon, say 10 years or more, why sell at all? Stocks will rebound from a second wave, just as they did from the first.
Do you have a question for me? Send it my way. Sorry I can’t answer every one personally. Questions and answers are edited for length and clarity.
Video of the week
Personal finance educator Kelley Keehn and I talk about the housing market and other money matters in this video.
Today’s financial tool
PwC Canada has created a tool called Incentive Assist to help people navigate government programs and incentives during the pandemic. Supply your mobile phone number and the exchange texts with a chatbot that links you to relevant programs.
What I’ve been writing about
- Five numbers that will douse any high hopes you may have for the housing market
- How ETF companies are undermining investor confidence in their best product
- Annuities cure stock market anxiety, but you better hustle if you want one (for Globe Unlimited subscribers)
More Carrick and money coverage For more money stories, follow me on Instagram and Twitter, and join the discussion on my Facebook page. Millennial readers, join our Gen Y Money Facebook group. Send us an e-mail to let us know what you think of my newsletter. Want to subscribe? Click here to sign up.
Rob Carrick