When applying for a mortgage many different factors are taken into consideration; net worth, income, job history, savings, payments, loans, other properties, and of course, credit.
Credit scores are a huge mystery for many people. If you’re like those who come into our office everyday then you probably know the basics in that a high score is good and a low score is bad. Beyond that the rest can get a little fuzzy.
As someone who looks at credit reports on a regular basis I love educating people on their credit report, what we are looking at/for, and how to improve their score. So if you want to become a credit expert or at least understand what it is trying to say, read on.
Recently the official name of the credit score changed to FICO score. In Canada there are two providers of your FICO score; Transunion and Equifax. A perfect credit score is 900 but anything above 700 is considered good credit. From 600-699 is average credit while below 600 could use some improvements. You might be asking yourself how this number actually grows or shrinks, good question. Every month that you pay a bill or payment on time you get roughly 5-10 points. Missed payments, late payments, inquiries, and overdrawn accounts all ding your account anywhere from 15-40 points.
When looking at a credit report it looks like an error report you would get off of an old printer with random numbers, letters, and gibberish. If you know what you’re looking at it gets easier to decipher. The first point of interest is the FICO score (see above). Below that is a summary of your credit history detailing strengths such as length of accounts and weaknesses such as too high of balances. Next it gives the personal information of the applicant including address, prior addresses, and employment history.
Below that it lists all of your accounts in the last 7 years. It details what the account is (credit card, student loan, vehicle payment, etc.) For each account it lists when it was opened, if it is in good standing, how many late payments it has had, how much is owing, and what regular payments are.
Lastly it discloses any bankruptcy or consumer proposals in the last 7 years.
Improving Your Score
For years people were told that as long as they paid their credit card in full every month they would build credit, unfortunately this isn’t the case. For credit cards and lines of credit we strongly recommend never using above 75% of the total limit available and if possible keeping it closer to the 30% mark. For example if you have a $5,000 credit card use a maximum of $3,750 and if possible keep it closer to $1,500. Surprisingly it is better for your credit to have a $10,000 limit and only use $3,500 in a month than it is to have a $4,000 limit using the same $3,500 per month.
1. Use a maximum of 75% of the total balance available but aim to use less
Another misconception is that phone bills do not count. Although they are not weighed as heavily by lenders they do still affect your overall score. They report to the bureau monthly and show if you have paid late or missed payments. For most people they miss payments simply because they forgot or were out of town.
2. Pay your phone bill on time, set your account to automatic payments if need be, just make sure it is paid on time.
These days any store you walk into will offer you a discount if you open up a credit card with them, don’t. Yes a couple of credit cards are good, fifteen is excessive. Having too many cards may look unfavorable to lenders and reflect poorly on you, especially if they are all full. Instead try to have a few cards with 24+ months of good repayment and history.
3. Limit your total number of credit cards. Focus on a few quality accounts rather than a large quantity.
A little known fact, when vehicle shopping many dealerships will ask for ID, this is normal. What most people don’t know is that they often pull your credit at this time. People are quite surprised when they walk in to get a mortgage and discover that all those test drives they did actually lowered their credit score.
4. Be mindful of who is pulling your credit and how often.
Did you know that you can get one free credit report per year? (see links below) We recommend checking your score and what’s reporting at least once/year. I personally have had error accounts reporting on my bureau and have seen clients come in not knowing they actually had an account in collections. This check gives you more control and the ability to ensure accuracy on your account.
5. Check your account regularly for errors and inaccuracies