Posted by: Nick Ametrano
Do you know what the the most important number is that you need to know when getting a home loan? It is not your Social Insurance Number, not your phone number, it is your Credit Score.
Your credit score is the number mortgage lenders use to determine how likely they are to be paid back if they were to provide you with a mortgage. Otherwise known as a risk score, it is a statistical measure of your capacity and capability to repay your liabilities.
Still not clear why this is important to you? Well consider this, in today’s new mortgage market (i.e., with the new federal government’s rule changes) missing a couple of car payments, Line of Credit payments, etc. can knock about 25 points off of your credit score. This could quickly move you from the “A Lender Bucket” to the “B Lender Bucket”. In more simpler terms, in today’s market this is the difference of you now paying close to 6% interest instead of closer to 3% interest on a new mortgage. Basically, you just doubled your mortgage payments…YIKES!!!
HOW DO YOU FIX THIS?
Below is a helpful guide that will give your credit score a boost so that you can get yourself back into that “A Bucket” and take advantage of lower interest rates:
The first step is to find out where you stand. You can contact the two major reporting agencies and request a copy of your credit score. There may be a small cost incurred; however, it is in your best interest to get this score. The two agencies are Equifax (www.equifax.ca) and Transunion (www.transunion.ca)
Now that you have the report take a look at repayment history. Your one late payment can stay on your report for 7 years. Ensure that there are no errors either. Statistics show that about 80% of reports have at least one error. If there are errors, you can formally dispute the error by filling out a form and sending it back to the reporting agency.
You’ve cleared up your errors, now look at your outstanding debts. Clearing up debts can take time; therefore, now may be the time to consider refinancing for debt consolidation. With rates at historic lows, speaking to an mortgage agent and attaining trusted mortgage advice can save you thousands of dollars and keep more money in your pocket, not your bank’s.
Remember that time is your best friend. Consistent payment, even small enough to cover the minimum requirement, will prove that you are responsible enough to repay your liabilities as promised. Over time these payments will outweigh any negativity on your credit report. Lenders like that a lot.
A good way of upping your score is taking out an investment loan (RRSP) and paying it back quickly with your tax refund. Paying the loan back in short time, will show that you are a good risk.
Having 3 – 4 trade lines (credit cards, line of credit, loan) is ideal. If you have more, the biggest mistake you can make is to cancel them. Contrary to popular belief, it is not a good idea to cancel and cut up your credit cards, just bring the balance down to zero. The agencies use a complex algorithm of outstanding credit, and outstanding balances to determine your overall credit score. Your potential lender wants to see that you have credit and that you use it responsibly.
Being consistent with payments and keeping a routine on your credit score will go a long way at ensuring that you can continue to take advantage of low interest rates so that you can pay off your mortgage and bad debts quickly.