Jan 13 2008
Your Credit: This article could save you $100,000s on your next mortgage (and your car payments too)
Like most people I never realized how important my credit score was until I started in this business. A credit score of 700+ (considered good to excellent in the lender’s eyes) will help you secure the lowest interest rate possible. A lower score will not prevent you from buying a house, but you may end up with a higher interest rate or additional fees. This also applies to car loans and leases (those advertised 0% financing are only for buyers with excellent credit).
Your credit score or “beacon” is used by lenders to predict the likelihood of you missing a payment over the next 2 years, whether or not you owe money or have balances on your credit cards have little influence on this score.
Your credit score is broken down into various components:
35% Payment History - This means paying your bills on time. You don’t have to pay off your credit cards every month, just always make the minimum payments. Most companies will allow you to send in a void cheque and set up an automatic minimum payment, or you can schedule it online with your bank.
30% Amounts Owed - Anytime you are using more than 50% of a credit account it lowers your score. Having balances below this on your credit cards does not lower your score. In the final months leading to a home purchase you may be better saving cash for a down payment and leaving balances on your cards. This decision should be discussed with a professional.
15% Length of Credit - Try and stick to the same credit accounts. It looks much better to have a visa you have used and paid since you turned 19 than constantly opening and closing accounts.
10% New Credit - If you are applying for every credit card you can or shopping around for mortgage rates this shows up on your report and lowers your score, you may be considered a “credit hunter.” Financial institutions will wonder why you were rejected by the other companies who checked your score, or why you are signing up for so many different credit products.
10% Type of Credit - The kind of credit affect how it is viewed. Bank loans are best, than major credit cards and lastly consumer cards (ie future shop, home depot cards). A bank loan paid on time every monthly looks great.
Things you can start doing now:
Everyone should pull their credit score (www.equifax.ca), it will cost you $23.95 and will give you your score and advice as to how to improve your score so you can have excellent credit. If you’re looking to purchase a home in the near future I can check and review your credit with you during the mortgage application process.
If you have high balances on your credit accounts try and pay them down or at the least spread them out (so no account is at 50%+ of its limit). If avoidable, do not apply for any new credit. Make sure not to miss any minimum payments, and if it is unavoidable call the creditor beforehand and ask for an extension!
If you are a student or looking to purchase in more than 2 years: If you don’t already have a credit card get two, building a credit history of 2 years or more is very important and having 2 different accounts is best. If you already have a lot of credit, don’t worry about outstanding balances, just make sure you do not miss payments. Try and stick to 2 or 3 credit cards and avoid closing accounts or switching banks too often.
This covers a basic introduction to credit. In addition to credit, lenders are also concerned with your income and the property involved, I’ll cover these 2 subjects later this month. I will also be writing an article on how to read your credit report in the future.
If you have any questions send me a message or better yet post it so everyone can see because you’re probably not alone.
Dan.
Please keep these excellent posts coming