If you’re buying or refinancing a home, having a good credit score is essential in order to get the best deal. Even if you don’t have a great credit history, there are methods you can use to improve your score and ultimately save money on your mortgage deal.
Your credit history is a record of all of your borrowing from the past seven years. It also includes things like bankruptcies, court judgments and liens. The credit-reporting agencies Equifax and TransUnion use a scale from 300 to 900. High scores on this scale are good. The higher your score, the lower the risk for the lender. Most lenders consider 680 or higher good credit.
Like your physical health, if you don't take care of your financial health, it will fall into disrepair. Treat your credit history like gold.
Mortgage experts often encounter potential clients whose score is too low, who tend to have difficulties getting a mortgage or other loans approved, or getting cheap credit. For these clients, there are alternative lenders available who will charge higher interest rates and a fee, and will require a bigger down payment. And for clients who don’t have a credit history at all, there are alternative ways to demonstrate credit worthiness.
How your Credit Score is Worked Out
- Payment History – 35% Every month that you make a bill payment on time – whether it’s your mortgage, rent, hydro, etc – is positive to your account. You also receive bonus points every year that you continue paying your accounts on time. You will lose points if you have a late payment, collection account, charge-off, foreclosure or judgment place on your credit. This payment history now includes cell phone bills.
- Utilization – 30% This is talking about the balances you have on each credit card. This is the fastest way to increase your credit score in a short amount of time. You get the maximum amount of points when your balance is one per cent to nine per cent of your available credit line. The good news is you also gain points for every 10 per cent you reduce your debt, so if you go from a balance of 80 per cent of your credit line to 40 per cent of your credit line, you will also gain points. The other important thing to note is that you should also only have balances on about half of your credit cards. You will get extra points if you pay off a card that leaves you with less cards carrying balances.
- History – 15% You receive points every year that you have a positive trade line open.
- Inquiries – 10% Who has been checking your credit and how many people? If you have too many inquiries, you will lose points in your scores. Inquires remain on your report for two years, although they stop deducting points for those inquiries after one year. An important note here is that this is another benefit of using a mortgage broker when shopping for a mortgage. They will only use one credit report and have access to multiple lenders, rather than having multiple lenders inquiring about your credit score.
- Credit Mix – 10% This is referring to the different types of credit: mortgages, car loans, credit cards, student loans, etc. If you only have one type of credit, you will gain points by diversifying your credit file and using another type of credit.
Credit organizations update your scores daily based upon the information that they are given by your creditors. Therefore, if you substantially pay down your debt, make sure you have a good mix of credit, pay on time and don't try to open too many new lines of credit at once.
Build up Credit History Fast and Easy
- Open one or two credit cards. If you can't get approved for a credit card, try a secured card. Secured credit cards require a small saving account, which will usually secure the entire credit line on your new card.
- Use your credit card for your daily purchases instead of cash or debit card. Don’t use it as financing, but as way of payment. Pay the total balance at the end of the month to build up your credit and avoid paying interest.
- Always pay on time your other bills, like cell phone, hydro, phone line, rent, etc. – especially now that cell phone bills are being reported on the credit report.
How to Improve your Score
- Pay off immediately any outstanding balance on loans, credit cards, etc. If you have a lot of debt and want to pay some of it off, you should consider debt consolidation.
- Always pay your credit cards and other loans on time. A late payment on a $10 balance has the same impact on your credit bureau than not making a $1,000 payment. Credit is based on trust, no matter what the amount.
- Don’t exceed 50 per cent of the credit limit of each credit card. Never exceed your credit limit.
- If you have student loan problems you should pick up the phone immediately and explore the many options that are available to get you back on track.
If you are having problems with your credit score, give a mortgage expert a call to discuss, analyze and develop a customized strategy on how to improve your credit.