What is a credit Score?
Your credit score is a number (called a beacon) that illustrates your financial health at a specific point in time. It also serves as an indicator of your financial past and how consistently you pay off your bills and debts. This is one of the factors mortgage professionals consider in qualifying you for a mortgage.
Since becoming a Mortgage Broker with CENTUM, I have encountered a number of clients who are completely unaware of their credit situation. It’s extremely frustrating when trying to buy a house, thinking you have done everything right when it comes to your credit, only to find out you don’t qualify. I have put together a few different credit situations and some tips to help you keep your credit in check so you can prepare for the purchase of your home.
1) No Credit or Limited Credit
This has been one of the most common things I have come across with my clients. Responsible clients who only buy things they can afford. They don’t believe in credit cards or racking up debt. These are probably the most frustrated clients when I tell them they don’t qualify right now because they have been working hard to save up money for their down payment and don’t understand why having debt is a good thing. I was one of these people!
From a lenders perspective, having no credit cards or loans makes it hard for them to determine how you are with making payments. This makes them feel more at risk giving you a loan, especially a considerably sizable loan like a mortgage. Lenders like to see at least 2 active trade lines (trade lines are what we call your credit cards, loans, line of credits) on your credit report. Your credit report tracks EVERYTHING so when a lender can look at this report and see you are responsible with your credit and that you are making your payments on time, they are far more likely to want to give you a mortgage.
Some people are afraid to have a credit card thinking they will go out and buy things they don’t need. You don’t have to get a credit card and go buy a new 52 inch TV with it. Use it to buy things you would normally buy anyway, like groceries or gas. With the increased use of online banking, it’s easier than ever to pay off your credit card without even leaving your house. Plus, you don’t pay debit fees for the transaction! And don’t close credit cards you’ve had for a long time just because you don’t want to deal with them anymore, they help provide credit history.
2) Damaged Credit
This category is a little trickier. By Damaged, I mean people who have been bankrupt, done consumer proposals or just don’t pay their bills on time. You may feel like you are a lost cause but you aren’t. Meeting with a mortgage broker really helps your chances of getting into a home as most Banks have little tolerance for people with poor credit, whether it be current or in the past. A broker has many more options, so if it can be done at all, a broker will get it done.
Not everyone with credit problems have them because they made bad choices. They are sometimes the cause of circumstances beyond ones control such as a divorce, a death in the family or a job loss. All these things can cause people to get behind on their bills. As in many cases, time heals all wounds meaning the further you distance yourself from the bankruptcy (or missed payments), the better your chances are of getting a mortgage. The lenders we use that are willing to work with clients who’ve had past bankruptcies normally require a discharge from that bankruptcy and a full year of re-established (good) credit.
Some ways to avoid damaging your credit score are*:
– Always pay your bills in full and on time. If you can’t pay in full, make at least the minimum payment EVERY time. That $10 minimum payment on your credit card may seem like no big deal but not paying it will show up on your credit report
– Pay off debts (such as loans, credit cards, line of credits etc) as quickly as possible
– Never go over your limit on your credit card, try to keep your balances well below the limit. Normally under 75% usage is the guideline
– Reduce the number of credit cards and loan applications you make. Each time you make a credit inquiry, it shows up on your credit report. Multiple inquires on your credit bureau start to make lenders question why you are applying for so many? Are you being turned down and wanting to try another one? Looking for anyone that will give you credit? Numerous inquiries will also take points of your credit scores. This is another advantage of working with a broker, only one credit report is pulled and we can use it to apply with multiple lenders
3) Good Credit
This is the category everyone should strive to be in. Good credit always makes life much easier. Typically a beacon score of 680 or higher is considered to be in the “good” category. These are the people that always pay their bills on time, don’t rack up credit cards beyond that 75% usage and pay down their loans in an efficient manner.
4) Here are a few other things that affect your credit score **:
– Age, address, phone number, dependents, length of time with same employer
– Type of credit
– Level of indebtedness
– Length of credit history
– Might want to keep trades with long positive history
– Employer on the credit bureau
– Bad debt stays on for 7 years
Canada has 2 credit-reporting agencies: You can contact either one to get more information on your own credit history. Equifax Canada – www.equifax.ca and TransUnion Canada www.transunion.ca. Its always a good idea to know what is happening on your credit report. It’s easier to clean up problems before you are under the time crunch of a live mortgage offer.
For more information on how to improve your credit score, contact me anytime!
Naomi Hamm, Mortgage Broker
Office: (204) 727-2177
Cell: (204) 724-7290
*source – CMHC website
**source – Equifax Canada