****This is a re-post of a guest blog I did for www.tamaranellissen.com ****
Recently, I went with my good friend and Realtor, Tamara Nellissen to a seminar on understanding your credit report and the credit rating system. When applying for a mortgage, your credit is one of the most important factors in determining whether or not you will qualify for a mortgage. Yet it is probably the single most misunderstood item. If you have ever been declined for credit in the past it can be especially frustrating as it has been my experience that no one takes the time to go through your credit report and coach you on how to improve it. Today it is my goal not only to shed some understanding on the subject but as well give you some action items that you can do TODAY to get your credit on the way to qualifying for a mortgage.
Why is your credit so important?
So many things in life depend on having good credit. In the past credit checks were usually limited to applications for credit products such as mortgages, credit cards, loans etc. But now? Companies use credit checks to open bank accounts, start new phone/utilities accounts, as part of the job hiring process, to rent apartments, rent dvds and qualify for insurance installment payments. This is why it is SOOOOO important to stay on top of your credit and keep it in good standing.
What does my credit score mean?
Your credit is summarized into a triple digit number, anywhere from 300 (poor credit) to 900 (excellent credit). The minimum credit score in order to qualify for a mortgage with a down payment of 20% or less is 600. Your credit score is fluctuating; it can be increasing or decreasing at any moment in time depending on how you are treating your credit.
So if you are reading this, you might be thinking to myself, okay, I know that my credit is not great but where do I start? If you are in a bad spot, it can be overwhelming and extremely discouraging. Let me break it down for you….Here are the top 5 reasons why your credit sucks and what you can do to change it:
1) Your payments are late.
This is the single MOST important determinant of your credit score. In fact, 35% of your credit score is determined by how timely you make your payments. So even if you can’t pay the full balance off each and every month, at the very least make the minimum payment on or by the due date. Information is kept on your credit bureau for 6 years! So if you miss a payment, that information will be kept on your file for a long time
Action Step: Are you forgetful? Most credit card companies can be set up to withdraw automatically from your bank account the minimum payment on or before the due date. This is a great feature as you will never miss a payment again. If you have been constantly late in the past or behind on payments, get caught up. TODAY. Repeat after me: “I will never miss my minimum payment again. I will never miss my minimum payment again.”……
2) You are maxed out.
This is the second largest determinant of your credit score. 30% of your credit score is determined by how much you owe vs. the limits on all the credit cards. So in short, the less you owe, the better. For example, let’s say that you have two credit cards both with $5,000 limits. On one card you owe $4,900 and on the other you owe $4,800. So out of the total $10,000 that has been loaned to you, you owe $9,700. This will produce a lower credit score than someone who has the same credit cards and limits but only owes a total of $3,000. Lenders and banks are hesitant to lend more money to a borrower who is maxed out. Simple as that.
Action step: Pay your balances down (or off!). Yes, this can be hard and yes you have to be disciplined to do this. Aim to get them below at least 50-60% of your credit limit. Reducing your balances will increase your credit score almost immediately.
3) You’re a Newbie.
Establishing a solid credit foundation takes time. 15% of your credit score is determined by the length of time that you have had credit and your payment history during that time. Mortgage lenders typically want to see that you have established at least two credit cards that have been opened (and have been used) for at least 12 months and want to see credit limits of at least $1,000.
Action Step: If you don’t have any credit, apply for a credit card. Today. Request a limit of at least $1,000 and payat least (if not more) the minimum payment every month on time with no exceptions. (See step number 1). Be prepared that if this is the first time you are applying for a credit card, the bank may ask for a cash deposit to hold on to for several months as security as you establish your credit with them.
4) You are shopping around for credit.
I am going to be brutally honest here. Stop. Getting. Credit. Cards. JUST SAY NO! Rip up those pre-approval offers in the mail. Tell the nice lady at the Bay “No, thank you” when she offers you 10% off your purchase today with a Bay card. You really only need 2 credit cards MAX. I always like having both a Visa and a Mastercard. That’s it. NO MORE! Every time you apply for credit, an inquiry is registered on your credit report and it decreases your credit score. The more inquiries, the more points come off your report. 10% of your credit score comes from how many people have looked (inquired) at your credit and every inquiry decreases your credit score.
Action Step: This is actually an “un” action step….. Stop getting credit cards! Stop letting people check your credit. Car dealerships are NOTORIOUS for letting lenders take multiple credit inquiries when someone is applying for a car loan. Before applying for a car loan, my suggestion to you is to not only take in a copy of your credit report yourself (see below) but strongly inquire as to how many credit checks will happen before you give anyone any authorization to check your credit.
5) You don’t have the right type of credit.
Credit Cards = good.
Loans and Lines of Credit from a major bank = good.
Department Store Credit Cards = not great…but not too bad
Pay Day Loans = bad
Insta Loans= bad
Get the idea? The types of credit you want are credit cards, loans and lines of credit from major providers. Department store credit cards are okay if used in the beginning to start building a credit report but you do not want any of those pay day loans or “insta” loans to show up on your report. 10% of your report is determined by what types of credit you have.
Action Step: Only apply for credit from major providers. Don’t soil your credit rating with a loan from a less than reputable source.
Final action step: Get a copy of your credit bureau. You can obtain a free copy once a year from either Trans Union (http://www.transunion.ca/) or Equifax (http://www.consumer.equifax.ca/home/en_ca) . This is the first place to start. You not only want to do this in order to verify that the credit that you have is being reported accurately but you also want it to protect yourself from any types of identity theft.
So in closing, I want you to know that you can change your credit. But you have to take the steps to do so today. As I mentioned earlier, credit information stays on your bureau for 6 years. So start to clean it up today. You can do it!
Thank you for taking the time to read this post. As always, I welcome any suggestion or questions that you may have in regards to this or any other mortgage related topic.