Managing Your Credit Score
A lot of people don’t know what goes into getting and maintaining a good credit score in their lives and why it’s so important to manage effectively. Part of my job is to coach clients about their credit, in particular the ones who may have had issues in the past with credit in order to help get them into the best mortgage product in the future.
Let’s start with something obvious: You’ve got to have some form of credit extended to you to build your score. The easiest place to start is by applying for a credit card. Typically a mortgage lender will want to see 2 “trade lines” ie. 2 credit cards, a credit card and a line of credit, etc. to establish some history and consistency on you, and how you make your payments. They want to know you can borrow and repay money in a timely fashion.
If this is your first credit card in Canada, your limit will likely start low. Use your credit card for day to day things like groceries or gas and pay it off soon after from your chequing account. Sensible and regular use will result in you getting an increase to your credit limit in time. If you can pay the whole balance off every month, do it. No one should be paying the interest rates associated with credit cards unless they absolutely have to.
Don’t go mad and apply for a whole load of credit in a short period of time. Doing this is deemed suspicious to a lender, so not only are you likely to get declined, your credit score will also take a hit. It looks like you’re desperate for money, and in the creditors view you’re unlikely to be paying it back.
You may think that missing the payment date on your credit card, line of credit, student loan or mortgage by a couple of days is no big deal. To a future creditor, it doesn’t matter if you were 1 day late or 10: Late is late, and that’s going on your credit report for all to see. Miss a couple of months payments, and you’re really going to hinder your ability to access the best rate mortgage products when it comes to buying a house in the future.
Life throws a lot of curve balls at us; paying the bills isn’t always our number one priority. Worst case scenario; you could be incapacitated somehow, and unless you have a significant other or family member who has access to your credit cards, line of credit, student loan, etc. the bills may not get paid.
It’s easy to set up balance alerts and automatic minimum balance payments from your chequing account to make sure that you never miss the due date, so just do it. Better safe than sorry. Even if you’re the most organized person in the world, things happen.
If something does happen to you and you miss a payment, you can add explanations to your filewhich creditors will see, but they don’t have to take that into account when considering you as an applicant.
High balances on credit cards have a detrimental affect on your credit score every month it reports. That’s right; if you’re using over 70% of your credit limit, your credit score is going the wrong way, and fast.
The best place to be? Using 30% or less than your credit limit. Any credit utilization above 30% could be negatively impacting your score. You can work out your credit utilization by taking your balance, dividing it by your credit limit, then multiplying by 100.
$300 balance; $1000 limit = 30% credit utilization. Perfect!
If you’ve got a few credit cards, spread the spending across them to keep the balances below 30% of the limit on each. Don’t be tempted to run the high balance on your credit card that rewards you the most cash back or points unless you’re going to be paying it off straightaway.
Your credit reports once a month on a particular date. If you’re running a high balance on that date, it doesn’t matter if you were planning to pay the card down to zero in a couple of days. That’s the amount that reports. Say you have a $1000 limit and have spent $450 on that card. If your credit reports, it’ll show you using 45% of your limit for that whole month.
You can pre-empt this by calling your creditor and asking which day each month they report to Equifax and TransUnion (they’re the companies who keep your score) and make sure to pay your balance down below 30% before that date.
Don’t go over your credit limit. Your card provider sets you a credit limit, but some do allow you to go over this limit. Doing this will incur additional fees, could increase your interest rate and is really bad for your score.
Keeping open those old credit cards you never use is a good thing as having a longer credit history is beneficial to your score. Your score is based off your total credit utilization ratio; so if you’re closing cards, you’re losing the maximum credit limit you have across the board. Remember, try to keep all balances below 30% of the limit.
If you have two credit cards; one with a $2000 limit and one with a $3000, your credit limit is $5000. That means you can run $1500 between the 2 cards to stay at the 30% threshold. If you close the card with the $2000 limit because you never use it, and you put $1500 on the remainingcard, you’re then at 50% credit utilization, and are now negatively impacting your score.
You can check your credit score online with Equifax or TransUnion, but they will charge you. There’s a section they don’t like to point out where you can check your credit by mail for free though. It’s recommended you do this regularly so you’re aware of any errors there may be on your report.
Here’s where you can do that:
It’s estimated there are errors on anywhere between 10% and 33% of credit files. If you find any, make sure you contact the appropriate creditor right away and have it removed from your record.Be sure to check with Equifax and TransUnion that it’s gone too.
Having an error on your file that needs clearing up could be the thing that prevents you being able to buy your dream home.
If you’re buying a house, your credit score is factored in as to whether you’ll get the best rates on a mortgage. Other debts you carry eg. credit cards, lines of credit, student loans, car loan are alsofactored into the equation of the maximum mortgage amount you qualify for. If you’ve got a lot of other high debts, you could be greatly decreasing your purchasing power.
Tim Ward is a Mortgage Agent with The Mortgage Centre. If you or anyone you know requires free independent advice pertaining to mortgages or managing your credit, please feel free to contact me via the below methods.
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