Mortgage Canada

Understanding Credit

The overall heath of your credit will have a large impact on your life. Be it trying to finance a car, get a credit card, obtain a loan, or buy a home your credit rating affects all aspects of your financial activities when it comes to borrowing money. Therefore it is important that you both understand the mechanics of how your credit report is generated as well as how you can affect your score.

Simply put, your credit report is a history of all your consumer debt. Have a credit card? It’s on there. Paying a loan? It’s being tracked. Here in Canada, the two main credit reporting agencies are Trans Union and Equifax. Both agencies have a credit history file on anyone who has ever borrowed money. Every time you borrow money, or make a payment on a loan or credit card, the lender then reports the information about the transaction to these two agencies. In addition to credit information, you will also find liens and judgments on your credit report as well as your address and possibly your work history. The accumulation of all of this information is called your credit report.

Depending on how well you make your payments and manage your credit, your credit report will either work for you or against you. Potential lenders and others, such as employers, view your credit history as a reflection of your character. Whether we like it or not, our financial habits have a lot to say about the way in which we choose to live our lives.

This brings us to your credit score. Your credit score is calculated using the history outlined in your report. The better you repay your debts and manage your credit the higher your credit score. The credit score, or beacon score, is a number which gives mortgage lenders an idea of your lending risk.

Credit scores range from 300 to 900. The higher your credit score the better. The mortgage products and interest rate that you will qualify for are often determined by your credit score. Here are some things to keep in mind:

• It’s just as bad to not have a credit score at all as to have a low score. The absence of a credit score means lenders can’t see a history and can’t judge if you are someone who knows how to manage their debt. Apply for a credit card as soon as you feel you can manage it so you can start the process of building your credit.

• While it’s very bad to go over your credit limit on credit cards or lines-of-credit simply approaching your credit limit will begin to diminish your credit score. Try to remain under 75% of your credit limit at all times.

• The very act of applying for credit can reduce your score. Lenders don’t like to see someone who is applying for lots of credit wherever they can. Limit your applications for new credit.

• Don’t close old credit cards. While this may seem strange, a deactivated card will eventually drop off your credit report taking with it all of the history that you worked so hard to build. If you no longer use a certain credit card simply put it in a safe place and let it keep working for you.

• If your credit score is low don’t be discouraged. Credit scores are not calculated linearly meaning it is much easier and faster to get from a low score to an average score than moving from an average score to an excellent one. Maintain healthy credit and you will see your score rise quickly!

• Keep an eye on your credit report. It’s not enough to pay your debts on time and assume that your credit is healthy. Lenders often report the wrong information and sometimes information that doesn’t even belong to you will show up on your report! Identity theft is also a big issue right now and it’s important to ensure that no one has used your identity to try to obtain credit.

A mortgage professional can help you obtain a copy of this report and go through it with you to verify that all of the information is true and correct.

The good news is that your credit report is a working document. This means that you have the ability over time, to repair any damaged credit and increase your credit score.