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Credit Challenges

To qualify for a mortgage loan, your credit history doesn’t have to be spotless, but you must have history and that history must clearly show your willingness to manage and pay your debts.

On this page, we talk about three situations that may require you to improve your credit rating.

  1. New to Credit - How to Build a Credit Score
  2. Bad Credit - How to Fix It
  3. Re-establish Credit - How to Rebuild After Problems

1. New to Credit - How to Build a Credit Score

As a mortgage broker, I meet many young people and newcomers to Canada trying to get into a mortgage to buy their first home only to discover they have no credit history or the credit history they do have is insufficient or tarnished. It takes time and effort to create or fix your credit score. It is assumed that most of us cannot afford to pay cash for a home, so a mortgage become necessary to raise the appropriate amount of funds for a purchase. Credit Score is a major determining factor in lenders deciding whether you get the best mortgage rate or a no on your mortgage application. If you are preparing to buy a new home, here are a few tips to make sure your credit score supports your home buying plans.

1. A person needs active trade lines to get a credit score. Trade lines can be credit cards, lines of credit, loans, car leases etc. Rent and paying bills does not show up on your credit bureau (unless you don't pay!) so they don't create or increase your score! Here's the simple truth: You must borrow and repay to create a history of your debt repayment habits! Use the credit you have regularly to establish and/or maintain a credit history. For example, use your credit card for gas, groceries, or one small purchase every month and pay it off every month. Having zero credit use diminishes trustworthiness in eyes of the credit bureau

2. Obtain at least 2 trade lines (credit cards, loan, etc) with at least $2500 maximum limit between them. Under $2500, the lender may not take the credit card activity seriously. Consider credit cards at a store you don’t shop at, or a gas card if you are worried about over spending. A secured credit card is a great solution if your bank won't give you a credit card.

3. Pay bills on time as agreed. Late, missed and unpaid bills lower your score. Set up automatic payment and overdraft protection on your bank account. (Paying one day late is NOT paying as agreed!)

4. Think twice about allowing someone to credit check you...multiple checks lowers your score...makes you look like you NEED money. Not to mention, not all credit checks are equal – “B” lenders (say a pay-day-loan) may drop your score more than “A” lenders!

5. Never max credit cards etc...stay below 30% of card limit for the best score and below 50% for next best score. High balances lower your score. Going over your limit is a score killer!

6. Finally, treat your credit like an asset which can maximize your buying power.

2. Bad Credit

When it comes to bruised credit, banks will often say sorry, but “pay your bills on time and come back in 6 months”. This is not particularly helpful advice and often leads to refusal again in 6 months. There are many factors involved in improving your credit score and paying your bills on time is just one part.

Step 1: How bad is your credit?

The first step obviously is to obtain copies of your credit reports and see exactly what needs to be repaired. You do this by contacting the 2 major bureaus and ordering a copy of your report and credit score. You can do this by going to their websites. (When you pull your own credit, it does not count as an inquiry against your score. Later, you may want to order free copies by mail to check on progress as you move through the steps. TIP - hidden on the Equifax form you can pay $10 for your score, alot cheaper than online.) Once you have your reports, treat each separately. Examine the first to see what accounts you have open, closed, and anything else you want to know. Our main purpose here is to remove all inaccurate information. Bad reporting, fraud and lazy banks can wreck havoc on your score. Any item that is listed as a public record or that has a late payment is considered derogatory, or bad. How many do your have? How many of these are accurate? Which ones are not? The inaccuracies are what we work on here. Let's say for example, that you have a Sears account that has late payments. And that you have never had a Sears account in your life. Our next step is to dispute this account.

Step 2: Dispute

Do not use the dispute forms that came with your report. There is a specific reason why that I explain, but for right now just trust me. Write your own letter in your own words. Tell the bureau that the Sears account is not yours and that you have never had one. We don’t want to lie to the bureaus. Include the account number of the Sears account as well. Tell the bureau in your letter that you want them to investigate and to remove this item. Do this with all inaccurate information on your report. It requires patience but is not very hard to do, until you run into the bureau roadblocks. And by that I mean when they write back and say, “No, the information is valid and will stay on your report.”

Step 3: Wait it Out

NOTE: If you have accounts that are accurate and negative disputing them will not work. Late or missed payments represent times that you did not have the funds to make a payment or you neglected to pay the date the minimum payment was due. This represents PAST habits right? Before you borrow, ensure you have the funds to make the payments and preferably... pay the balance in full. The first thing to know is that in most provinces negative information will be deleted from your reports automatically after 6 years. If you have an account that is close to that 6 year time limit, you might just ignore it. It will be gone by itself. Note that the 6 years starts after the account has been closed or after the last activity on that account. But if the account is turned over to a collection agency, they can list a collection on your report whenever they want to and the 6 years starts after they list it. So what could happen is after a company writes off your account as a bad debt, your six years start. But if they sell that account to a collection agency and 3 years later the agency decides to post it on your report, that same account will not be listed twice. And the collection will have another 6 years before it drops off.

Step 4: Pay it off

If you don’t feel like waiting years to improve your credit so you can get a mortgage to buy a house, no matter HOW righteous your cause, the next thing you can do is simply pay off your outstanding balances and any collections. Paying down your current balances on both you positive and negative accounts will improve your score. If you decide to pay off your negative accounts/collections, make sure you close those accounts and that those accounts show up as “closed by consumer” or "paid in full" on your report. You may even be able to convince them that you only have a certain amount of money to go around and to accept a partial payment. Once you have an agreement, review the whole deal once again so that all parties are clear. Then ensure they will provide you a letter confirming the transaction once you have done your part. When done, make sure to get the letter because you may need it to prove to the bureau or mortgage lender that the account has been dealt with.

Step 5: Balance it out

Once you have disputed all inaccurate information, paid down your balances as much as possible, and got tired of waiting, you may be able to improve your credit by adding new credit. 

3. Re-establishing Credit

The majority of mortgage lenders are "beacon-driven" lenders, meaning they base their mortgage approval decision on your credit score. Most often, as part of the bankruptcy or consumer proposal process (also called Orderly Payment of Debts, Creditor Proposal, etc.), all of your credit cards and loans accounts are terminated. Down the road, your bankruptcy or OPD/CP is "discharged" and the credit rebuilding process can begin.

Note - even though a discharged bankruptcy or CP appears on your credit report for a number of years, you can still get a mortgage before it drops off the report.

To begin re-establishing your credit, it is assumed:

  • Your bankruptcy or CP has been discharged
  • You have pulled your own credit report and corrected all inaccurate information
  • You have had a mortgage professional review your credit report looking for potential problems

Add New Credit

The next step is to improve your credit rating is by adding new credit. But please use credit wisely. This is exactly what lenders are looking for - a demonstration that you use credit wisely and pay as agreed!

New accounts that are in good standing (the key!) can help improve your score. Keep in mind that your credit score gives more weight to recent developments. What I mean is that a new account in good standing is more important that a negative account that is 5 years old. Get acquainted with when the debt is due and make that payment early! Some cards allow a minimum payment to be debited automatically from your bank account so use that to make sure you are never late again. Set up automatic payment whenever you can!

A person needs at least 2 active trade lines to accelerate the increase of your credit score preferrably with combined credit limits (not balances!) of $2500 or higher. Trade lines can be credit cards, lines of credit, loans, car leases etc. Most mortgages do not show up on your credit bureau and thus mortgage payments do not increase your score! Secured credit cards are a great way to start if your credit is “0” or you have a “reject beacon” or your bank just won't give you a credit card.

Now use the cards.

Don’t max out your credit cards ...stay below 30% of card limit for the best score and below 50% for next best score. High balances relative to your credit limits lower your score.

By following these simple steps you can be on your way to great credit and financial security. Fixing your credit is simple, but not an easy task. It takes time and some effort. But it is possible. And you can do a better job for yourself than anyone else. Don’t give up and resort to credit repair doctors and lawyers (who charge an arm and a leg to do the same things I outlined for you here for free) only if you just don't have the time. But ya gotta do it one way or another.

    

As licensed professional mortgage brokers, we know exactly what it takes to qualify you for a mortgage and we do more than just get you a great mortgage at a great rate, we will show you the way, too.

    Can I get a mortgage? Find out now.
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    Credit Score Improvement Program

     

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