Increasing your credit score when considering the purchase of a home and obtaining a mortgage is important to have a high credit score. But more importantly you should have good overall credit.
Starting with the basics, what is a credit score and credit report? When applying for credit, companies consult one of two central reporting agencies – Equifax or TransUnion. Equifax, the larger of the two, is most commonly used. Whenever a lending company extends credit they report to either Equifax or TransUnion or both, on your credit limit, credit used, and status of repayment. A person’s total score and report are based on all the creditors’ information combined together.
There are a couple options for checking your own credit score. You can have a certified Canadian Home Buyers Mortgage Broker get your report for you OR you can do it yourself. If you choose to do it yourself you can purchase your credit report directly from Equifax (www.equifax.ca).
Equifax does offer free reports, however, they do not include credit scores on the free reports. This lack of information severely limits their usefulness. The advantage of checking your score yourself is that your report and score are unblemished.
When another institution or company checks your score it will affect your score negatively to a small degree. Whether you order your own report or you have a broker do it for you …know your score.
To qualify for the best mortgage rates and products you will want to ensure that you have at least 2 accounts that have been active for at least 2 years. Ideally your credit score would be north of 680. It is possible to work with less, but your options may be more limited.
If your score and report need some work, what can be done?
1. Pay bills on time. While this may seem like a bit of a no-brainer, it is the basic foundation of a good score and a good report. Nothing will hurt your score more than consistently missing payments.
2. Low balances. Credit cards and other revolving credit facilities are very important methods of establishing your credit. Know this though: high balances will hurt your score. They also tell lenders that you might be a client who overuses credit, whether that is the case or not. Keeping your balance to less than 50%, will help you improve your score, while going above 75% can hurt it.
3. Pay Quickly. Pay off your high balances as fast as you can – preferably monthly. At the very minimum, make sure you are keeping up with your minimum payments.
4. “Flash” your Cards. All credit card companies will automatically pay your monthly charges if you phone to request this. It’s a great way to eliminate interest charges, and it builds your credit rating fairly quickly.
5. What you need. Do not seek more credit just for the sake of it. Opening new accounts lowers the average age of your existing accounts, which can bring down your score. Don’t be a credit glutton.
6. Old accounts are good. That old account you don’t use anymore that you were considering closing? DON’T! Unless there is something terribly wrong with that account, closing an older account will again reduce the average age of your accounts. Use the account now and then to keep it current, but again, make sure to pay your bills on time.
7. Eliminate Errors. Nobody is perfect. Not even the companies who are responsible for reporting your credit usage. If you find an error in your report you can have it removed by contacting Equifax. Removing these errors can be the difference between “Approved” and “Declined”.
8. Limit applications for credit. When you are trying to open a new account, do not apply for a card or loan unless you have already decided on the provider. Too many credit applications in a short period of time will lower your score, and could hurt your eligibility. When it comes time to make your home purchase, a mortgage broker can help you with this very point. As brokers generally have similar interest rates available, you should determine who you are going to use before ever making an application. Select a broker you trust who has proven their ability to manage your mortgage and help you reduce the overall cost of homeownership.
9. Meet with a credit counsellor. As a last resort, if you have major credit issues you are unable to solve on your own, consider meeting with a credit counsellor. In this regard, be very careful. There are a lot of “wolves in sheep’s clothing” out there in the credit industry. Select a company that is non-profit and can show you how they will help you improve your credit and get out of debt. Do not listen to companies who tell you they will help you pay less than what you owe – it will end up costing you more in the long run.
10. Time. Sometimes it just takes time. All of these things need to be done for a while before they will have much effect on a person’s score. In this, patience can be a real virtue.
A final note to address the severely credit challenged: If you are recovering from a bankruptcy or consumer proposal you will likely need more extensive credit counselling. There are mortgage products available to the credit challenged, but you will find they are more costly than and not as attractive as what is available if you can improve your credit.
The basics of credit are really quite simple – get what you need, use it wisely, pay your debts quickly. Your discipline and hard work will pay off.
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