A lot of people ruin their credit rating for no good reason. They miss payments or do other things that hurt their credit history.
When you begin shopping around for a mortgage the importance of your credit history and score becomes evident.
Your credit score is an important item that will determine what interest your mortgage agent will be able to offer you. It should be a priority because it can save you thousands of dollars. Whether you have had credit for a long time or are completely new and just beginning, you will have to at some time or another prove that you are a low enough risk for lenders to lend to.
What is a credit report?
A credit report is a quick look into your credit history. If you have taken a loan or used a credit card you will have a credit history. Financial institutions, trust companies, credit companies and grantors that give you credit may send information about whether or not you make your payments on time to a credit-reporting agency/bureau.
Credit bureaus collect information about you and how long it takes you to pay back money you have borrowed. This is called your credit history.
Credit lenders rely on a credit bureau to analyze an applicant’s current and past credit history in order to determine the likelihood of future repayment. This provides a fairly accurate indication of future repayment trends.
Do you know your credit score?
Your credit score is a number that illustrates your financial health at a specific point in time. It's also an indicator of how consistently you pay off your bills and debts.
Your credit score is one of the factors lenders consider when qualifying you for a mortgage. A good credit score, for example, can help improve your chances of being approved.
To find out your credit score, contact Canada's two most popular credit-reporting agencies: Equifax Canada and TransUnion Canada. These agencies can provide you with an online copy of your credit score as well as a credit report - a detailed summary of your credit history, employment history and personal financial information. (You can request your credit report by mail for free but your score is not included. If you request your credit report online a fee is charged and your credit score is included.)
If you find any errors in your report, notify the credit-reporting agency and the organization responsible for the inaccuracy immediately.
What’s in your credit report?
Your credit report usually contains personal information such as your name, current and previous addresses, S.I.N., phone number, date of birth and previous employer/s, and financial information such as credit cards, lines of credit, loans and mortgages and bankruptcies, court judgements and backed secured loans which are considered public records and debt that was referred to a collection agency for payment. It also shows a list of credit report inquiries: You, your lender, or any other authorized agent is also included which is usually used to determine if you are a credit seeker - someone who applies for a lot of credit.
How are you rated?
The credit agency describes your credit history by rating it. A scale of 1 to 9 is used with 1 meaning that you pay your bills within 30 days and 9 meaning you have bad debt, never pay your bills, have been placed for collection or claimed bankruptcy.
In front of the number there is a letter. The letter stands for the type of credit you are using. R means you have revolving credit such as a credit card, O means you have open credit such as a line of credit and I means you credit has been given on an instalment basis.
Your credit score is a numerical representation of the your current and past credit. It can range between 300 representing the lowest and 900 representing the best rating.
The breakdown that is used to determine your credit score is the following:
- 35 per cent – Payment history
- 30 per cent – Amounts owed
- 15 per cent – Length of credit history
- 10 per cent – New credit
- 10 per cent – Types of credit
Top Tips for improving your credit score
- Always pay your bills in full and on time: This will have a positive effect on your credit score.
- Never go over the limit on your credit cards. Keep your balance considerably lower than the available credit limit provided.
- Try to reduce the number of credit card or loan applications you make. Multiple credit inquiries can lower your credit score.
- Pay off your debts as quickly as possible
- Always maintain a credit history. You can use a credit card to build a good history.
- The best mix of credit is a combination of a store credit card and a major credit card such as a VISA or MasterCard. It is important not to have too many credit cards or store cards as that may negatively impact a credit score.
To find out more about credit scores and reports, you can also visit the Financial Consumer Agency of Canada website and download or request a free copy of their guide, Understanding Your Credit Report and Credit Score. This guide provides practical, straightforward information on how to obtain and understand your credit report and score, as well as how to build and maintain a good credit history.
Shopping for a mortgage can be confusing, the product features vary significantly. Having sold real estate in Whitby and the Durham Region for over 20 years, I can help you with the buying process. If you wish, I can refer you to a mortgage specialist that can explain the products and help you choose the right mortgage product. Contact me today!