I had the pleasure of meeting with a young professional woman this week who was interested in seeing if she would qualify for a mortgage so she could invest in her own home. During our meeting she expressed concern about having her credit checked and the impact on her ability to get a loan. When I pulled her credit report she had a great credit history and excellent credit score of 801. So I thought an article about your credit score and how it is determined would be helpful for my readers.
Your credit score is a judgment about your financial health, at a specific point in time. It indicates the risk you represent for lenders, compared with other consumers.
There are many different ways to work out credit scores. The credit-reporting agencies Equifax and TransUnion use a scale from 300 to 900. High scores on this scale are good. The higher your score, the lower the risk for the lender. Lenders may also have their own ways of arriving at credit scores. In addition, lenders must decide on the lowest score you can have and still borrow money from them. They can also use your score to set the interest rate you will pay.
Which parts of a credit history are most important?
35% – Your Payment History
30% – Amounts You Owe
15% – Length of Your Credit History
10% – Types of Credit Used
10% – New Credit
Top 5 tips for improving your credit
1. Pay your bills on time. Pay your bill in advance of the due date, ensuring it reaches the creditor before the payment is due. Pay off debt, don’t move it around. Owing the same amounts, but having fewer open accounts, can lower your score if you max out the accounts involved.
2. Contact your creditors as soon as you know you will have a problem paying bills on time. Try to work out a payment arrangement and negotiate with them to keep at least a portion of the late notations off of your credit reports.
3. Reduce the number of active credit cards to 2 or 3 accounts. Revolving credit includes department store cards, grocery store cards and gas cards. Establish a minimum of 2-3 trades with good repayment history for 24 months
4. Keep account balances within 50% of the available credit limit – Keep your credit card balances low. High debt-to-credit-limit ratios drive your scores down.
5. Pay or satisfy all outstanding collections and judgements
It is advisable to avoid applying for credit and having your credit report checked unless you have a genuine need for credit. The risk to consumers with a lot of activity on their credit report over a short period of time is that a lender may interpret this as a sign that you are in financial difficulty or taking on more debt than you can manage.
Your credit score is important and you need to take action to make sure that you will be able to borrow money when you need it. If you currently have a low credit score don’t be discouraged. Take action. Start doing the things that will cause your credit score to improve. Be consistent and before you know it you will have better credit.
When you are ready to pursue home ownership, call me for your mortgage! I pull your credit report once and submit it to the lender. If there are some issues on the report that needs to be addressed, I can guide you through that process.
Enjoy the summer!
Karen Boies, Mortgage Specialist 604-726-9550