One of life’s biggest mysteries is trying to figure out how your credit score is calculated. Although there are many different variables that can affect your credit score, I will give you helpful, easy to understand advice on how to improve your credit.
Over the years, we have taken many mortgage applications and occasionally we have some of our Canadian clients applying for a mortgage who have never had a credit card or loan in their lifetime. In our industry, there is a saying that “No credit history is worse than bad credit history”. The reason is that if a lender cannot see a history on how you handle your credit, how can they make a decision to lend you thousands of dollars?? The first thing I would recommend is getting some type of credit card. Lenders and mortgage insurers like to see at least a $2500 credit limit and at least a one year credit history. Of course, the longer the better. Now that you have that credit, here’s what to do:
Payment History: Always, always, always, make your payment by the due date. I cannot stress that enough. The more late payments that appear on your credit bureau, the more your score will deteriorate.
Outstanding debt balance: The higher the balance on your credit cards or lines of credit in comparison to your credit limit, the worse off it will be for your credit score. Ideally, you will want to pay off your credit card balance in full every month, but if that is not possible, you should keep your balance under 50% of your credit limit. Anything over that will hurt your credit score.
Account History: The longer you have a credit account, the better is it. I personally have a GM Visa I got while attending UWO (many, many years ago). I still have this card. I just have an automatic charge going to it and then I pay it in full every month. Just keeping it active on my bureau is helping my credit score.
Credit Inquiries: The more often that you apply for credit, the more hits or inquiries you will have on your credit bureau. You should apply for credit in moderation. If you have multiple inquires in a short time period, your credit score will suffer.
Types of Credit: The types of credit accounts you have (visa, line of credit, loans, etc) all affect your credit score and each carry different weight. A healthy credit profile has a balanced mix of credit accounts and loans.
I always recommend checking your own credit bureau once a year. You can order it online from www.equifax.ca. There is a minimal cost to order this way. If you find any errors (and believe me, they do happen), you should have them corrected immediately.
When applying for a mortgage, lenders are concerned with mainly three things:
1) Employment—Stability and income
2) Down Payment—the more the better
3) Credit History
Your past credit history is the only way a lender can determine what type of credit risk you are. The higher the score, the more likely you will get the best discounted rates out there. If your score is damaged, you will need to be prepared to handle higher interest rates and fees when looking to refinance or purchase a home. If you have any questions regarding your specific situation, do not hesitate to contact us at 519-649-2834.
Thanks for reading!
Your London, Ontario Mortgage Brokers at Dominion Lending Centres Forest City Funding FSCO# 10671