If buying a Waterloo Region home is on your radar this year then no doubt you are already thinking about your finances. If you are a first-time buyer and will need a mortgage to purchase the home of your dreams (for now) you may be worried about your chances of being approved (or, as we prefer in the real estate business, pre-approved)
Your credit score is increasingly important these days, since not only can a poor score impact your ability to get a mortage to buy a home. It is not the only factor that lenders consider when you apply for a home loan, but it is a big part of that decision.
Is your credit score below 680? If the answer is yes then you may want to start doing something about it, as a score below 680 is considered somewhat unfavorable by most Canadian banks and lending institutions, especially when it comes to obtaining a mortgage.
In order to begin improving your credit score, you need to first understand how the credit bureaus come up with it in the first place. The following factors are generally examined when your credit scores are calculated:
Payment History – The more of your bills you pay in a timely and consistent manner the better your score. However general utility bill payments are not usually reported to a credit bureau unless they go into collections, so are not much help if you are trying to build credit.
If your credit score is below 680 one way to increase it is by applying for a secured credit card, using it wisely and paying off more than the minimum balance every month.
Outstanding Balances – When it comes to any credit cards you may hold try to keep any outstanding balance to less than 30% of your available credit and keep car and personal loans to a minimum.
Recent Inquiries – Too many credit applications can damage your credit score. Every time a lender checks your credit report it creates a “hard inquiry” so if you are applying for a mortgage or another line of credit do your research before you apply, and keep the number of actual applications you make to a minimum. We have heard far too many horror stories about a mortgage application being denied simply because the potential borrower applied for a new credit card the week before!
Credit Mix – In order to stop your credit score falling below 680, your credit file should contain a balance of credit accounts and traditional loans. If you are considering consolidating some of your debt you need to remember that long-standing positive credit lines can go a long way towards preventing your credit score from slipping below 680, so do not completely close long-standing credit accounts on which you have a positive payment record.
Simple Ways to Begin Improving Your Credit
Now that you understand exactly what impacts your credit, what are the best ways to get it up to that ‘magic number’ as quickly as possible and improve your chances of getting the mortgage – and the home – you want? Here are just a few suggestions:
- Pay your bills on time.
- Delinquent payments, even if only a few days late, and collections can have a major negative impact on your FICO Scores.
- If you have missed payments, get current and stay current.
- The longer you pay your bills on time after being late, the more your FICO Scores should increase. Older credit problems count for less, so poor credit performance won’t haunt you forever. The impact of past credit problems fade as time passes and as recent good payment patterns show up on your credit report.
- Be aware that paying off a collection account will not remove it from your credit report.
- Keep balances low on credit cards and other “revolving credit”.
- Don’t close unused credit cards as a short-term strategy to raise your scores.
- Don’t open a number of new credit cards that you don’t need, just to increase your available credit. This approach could backfire and actually lower your credit scores.