Raising Your Credit Score
Your credit score plays a large role in your ability to obtain a mortgage, and the amount of mortgage you might qualify and be approved for. Your credit score is essentially a snapshot of your current financial situation and gives lenders an accurate indication of your ability to pay back a loan, based on your previous debt repayment history. Because your credit score plays such a large role in the mortgage approval process, it should be one of the first things that you check, and it is best practice to monitor on a regular and ongoing basis. Here are a few tips when it comes to protecting and improving your credit score.
Protect Yourself
Knowing the state of your credit, and reviewing at regular intervals, goes a long way in protecting yourself against potential fraud, and helps you ensure your credit is not negatively affected by actions that may be out of your control. Many people believe checking their credit score has a negative impact on the score itself. This is untrue; when regular everyday consumers check their scores, it has no effect on the overall credit rating. It is only during loan applications, or other large purchases requiring financing, when a credit score is pulled by a financial institution or other lender, that the score can be affected. Checking your credit score also does not need to be a costly endeavor, and there are many free resources out there to help you. Most credit reporting companies such as Equifax and Trans Union offer a free version of their credit reporting tools. Other companies such as Borrowell, in particular, seek to provide underserved Canadians with free access to their credit as well as credit education, and also provide financial products specifically aimed at improving credit scores.
If you are monitoring your credit on a regular basis, and your score is not quite as high as you would like it to be, below are a few tips on improving your credit score prior to applying for mortgage financing.
Make A Monthly Budget
The first step to improving your credit is creating a monthly budget and maintaining strict adherence to it. Without creating and maintaining a budget, you run the risk of making unnecessary purchases, and spending more money than you can handle paying that month. In-turn, this places you in a cycle of constantly carrying balances on credit, and never getting ahead of the payments. Creating a budget helps to identify your financial capacity and your immediate financial needs as well as helps to determine your fixed vs variable expenses while also identifying unnecessary expenditures.
Always Make Your Payments On Time
This may seem like an obvious point, but if you have fallen behind on payments, protect your credit by getting back on track and making those payments on time, or even early if possible. Making on time monthly payments not only helps improve your credit, but also saves you in extra incurred interest and late fees. Eventually, with discipline, you may get to the point of paying off the entire balance each month further saving interest costs and building a good payment history that creditors will be able to see.
While credit cards are convenient for everyday purchases, they do not need to be used very frequently to help build your credit. If you struggle with making unnecessary purchases, or purchases that put you in a negative financial situation, consider using a credit card for only certain regular purchases, such as fuel on a weekly basis, or grocery store purchases only. Once the purchase is complete, pay off the balance immediately so it’s not forgotten about, and as always, include it in your budget.
Pay Off More Than Your Principal Each Month
Do you carry a balance on your credit card each month, only making the required monthly payments? Get out of this habit so that you can get ahead of the game and maintain a $0 balance each month. For some it may be a difficult task to get ahead on the payments and achieve a $0 balance, so it’s best to start slowly. As always, make a monthly budget so that you do not overspend, but include a little extra for your credit card payment in this budget. It only takes a little to get the snowball rolling; for example, if your monthly payment is $100, consider making a payment of $120 dollars, and slowly increase this over time. Before you know it, you will be in the black, and the more you practice this, the easier it will become. Further to this, you will be slowly saving on interest expenses, which will begin to compound in the amount of extra money you have available to put in your card.
Don’t Have any Credit?
Having no credit history when it comes to searching for mortgage financing can make it just as difficult to obtain approval as having poor credit. If you’re thinking of purchasing a home at some point in the future, begin to build good credit early. When it comes to your credit history, generally lenders are looking for about two years or more of established credit as well as multiple trade lines. If you’re just starting to build your credit history, keep all of the previous tips in mind. Starting with a solid and easily achievable budget is the best place to begin. Developing good spending habits and maintaining a $0 balance on your credit cards will help to keep you in check and make sure you don’t overspend.
Monitor Your Debt Levels
Always keep track of your debt and credit levels. When it comes to mortgage approval, and maintaining good credit, the amount of used credit plays a role in both your credit rating, and how much debt a lender believes you can service. As a rule of thumb, maintain a debt level below 30% of your allotted credit. For instance; If you have a $10,000 limit on your credit card, try not to exceed $3,000 in a balance if at all possible. Maintaining a high level of credit usage for long periods of time can negatively affect your credit score.
Although credit plays a large role in mortgage approval, it is not the only factor to be considered. If you are interested in applying for a mortgage, or would like some advice on what mortgage options are available to you, or what other considerations to keep in mind, give me a call. I would be happy to review your financial situation and recommend the best path forward for your financial journey.
