Your credit score in Canada is based upon a three-digit number ranging from 300-900 that tells future lenders how risky it is to lend you money based on your history of making debt payments. Lenders will look for a minimum 2-year history on the credit report, with 2 active trade lines in order to gauge your credit repayment history.
Myth 1: Paying cash is better than credit.
Truth: You need to use credit in order to build credit, and demonstrate your ability to make payments. Using credit at least once every 30 days and making payments on time will keep you in good standing.
If you can find a happy medium between the two, will put you in a stronger financial position for future borrowing purposes. Use credit for emergencies, or occasional small purchases to keep the rating going, and then pay the balance in full when the statement arrives; win-win!
In some circumstances, alternative forms of credit can be used to qualify if there is little history on the credit report: a lease or rent letter from your landlord, a bank reference letter confirming no NSF’s in your banking history, a letter from your insurance company of good repayment history on your car or tenant’s policy, or a 1-year billing history from a local utility bill are a few examples we have used in the past.
Myth 2: Only use major credit cards to build a good score.
Truth: If you’re unable to obtain a major credit card, there are other ways to build your credit history. Making regular payments on instalment loans such as a car lease can positively affect your score, as do department-store cards and secure credit cards, which require a cash deposit in the amount of the credit limit. Look at starting with one of these for a while and then try applying for a major credit cards after 6 months or so.
The frequency or how often you seek credit can also factor into your score. It is a process, and if you force it and try to apply at too many places at once can backfire with a low credit score as a result. Lenders will view you as a ‘credit shopper’, or worse – you could be approved for all of the accounts you applied for and look like you are at risk of being over-indebted!
Myth 3: I have made some late payments or missed payments on some of my bills, I will never get back on track.
Truth: It takes time, but your credit will become positive as you build consistency with timely payments. How much time it will take depends on a number of factors, including how long the ‘late payment’ has been on your record and how long you’ve had the debt.
One tip might be to set up automatic payment options with the account. Some companies have this option that you can time to match paydays, or debit the bill from your bank account or credit card automatically – set it and forget it! Now, just don’t forget to make sure the funds are available for those bills to come out.
Also be prepared to have a good answer for the question of ‘why did it get behind’ on missed payments!
Myth 4: I will not qualify for a mortgage if I have a low credit score.
Truth: Lenders look at your entire financial picture, including your assets, available cash flow, and debt-to-income ratio. They’ll also review your housing expense-to-income ratio, which is a comparison of your expected monthly mortgage payment with your gross monthly income.
A very good credit score of 680 will afford you most lenders and products, however, some lenders have lent to clients with lower scores. Non-prime lenders will be willing to take a risk on the right client who meets all the other criteria if credit is a little weaker.
When any lender is considering to lend to a prospective borrower, the 5 C’s of credit are still considered, and this is part of the thought process when determining your application:
- Capacity. Review the borrower’s ability to repay.
- Can they handle the debt? Will the new debt result in payment shock in relation to their current situation?
- Capital. A measure of a borrower’s net worth and demonstrates ability to manage their finances while repaying debts.
- Do they have sufficient financial resources? Do they have their own down payment? Have they shown a history of savings or other asset-building?
- Collateral. The pledge of assets taken as security against borrowed monies.
- Can their assets back their debts? Is the property value supported in relation to down payment or would a co-signor provide additional comfort?
- Credit. An analysis of the credit history will give an indication of the ability and desire of the borrow to repay debts.
- Do they pay bills on time? Is there sufficient repayment history to support this amount of debt?
- Character. Borrower’s stability in career, residence, and willingness to provide complete and accurate information.
- How long have they lived at their present address and worked at current job? Do any of the other 5 C’s contain inconsistencies or cause to question the ability to lend? Would you lend them your own money?
Final note: the credit score you may have obtained from online services are often times different than the scores that we obtain for credit purposes. Don’t always rely on that to be 100% accurate. For more information about your credit score, and how it may affect your mortgage application, please contact me today.
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