One of the biggest concerns home buyers have, especially first time home buyers, is their credit. I have a lot of people come in not knowing what their credit is like or how the credit score even works.
Although the credit score is based on a formula that is a mystery to everyone, we do know roughly what effects your credit rating. Your credit score can range anywhere from 300 to 850 and is based on the following:
* Payment History 30%
* Balances 25%
* Length of Credit History 15%
*Types of Credit 10%
* New Credit 10%
* Inquiries 10%
Mortgage lenders and Insurers are looking for you to have a credit score over 620 for them to look at helping with the mortgage application. Some mortgage products may need you to be above the 680 mark.
If you are just starting your credit or looking to increase your current score there is a few things to look at doing to help your score.
Most importantly – PAY YOUR BILLS ON TIME. This does seem like the logical thing, but even the slightest slip can cause your score to drop 20 points. Some lenders will report to your credit bureau the day after you showed late on your payment, some other lenders are a little more forgiving. This is, by far, the most important thing.
KEEP YOUR CREDIT BALANCES AWAY FROM YOUR CREDIT LIMIT. Showing that you have a $2000 credit limit and have $2000 outstanding on your balance can show that you are in a tough financial position and need your credit, thus lowering your score to keep you from falling further in debt. If you have to carry a balance on your credit, Try and keep your balances close to the 50-60% mark of the credit limit.
DO NOT BE A CREDIT HUNTER! To many inquiries can harm your credit. Shopping at all the department stores and applying for their cards to save 10%, can come back to haunt you. Try and keep your credit inquiries down to 1 per quarter, if you need to do them. When applying for a mortgage with a mortgage broker, we pull your credit report once, and can shop it to over 40 different lenders with that one inquiry.
KEEP YOUR CARDS YOU HAVE HAD FOR YEARS! if you were just offered a good deal to transfer your balance and save 20% in interest, that can be a good thing. To close the visa or MC that you have had for 5 years and keep only the new one that you just received, that’s not always the best choice. The longer length of credit history with one lender will help increase your score.
If you have had credit difficulties in the past and are looking to get back on track, try applying for a Cash Secured Card. A lot of companies offer this. How this works is you give them an initial $500 deposit and they give you a $500 Credit card. After you show that you can work the card as agreed you get your money back and keep the card. This get you back in the credit game. Deposit to credit ratios vary among lenders.
To look at your credit report go to http://www.equifax.com/home/en_ca (this is a link for a Canadian report, if you are outside Canada, you can change the residency in the top left corner.)
Checking your credit report yourself does not in any way harm your score. It is encouraged that you look at your own report once a year to make sure there is no suspicious activity on your report.
Don’t just get a mortgage, KNOW your mortgage.
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Scott Bourke, AMP
Dominion Lending Centres Regional Mortgage Group
866/403-343-1125 Phone 403-343-1126 Fax