Improving Your Credit – The 7 Rules

I’m often asked what affects your credit score and how to improve your credit. Whether your credit is good or could use improvement, knowing how to improve and maintain good credit is extremely important; It is one of key things a lender looks at when deciding whether to grant credit or not. To illustrate how your credit score can affect your borrowing power, consider this real-world example:

When applying for a mortgage, if your credit score is above 680, your mortgage payment + property tax + heating costs cannot exceed 39% of your gross income. On the other hand, if your credit score is below 680, it cannot exceed 35%. This sounds like a small difference, but in actual terms, it would reduce your maximum mortgage by 15%. In other words, if you would normally get approved for a $500,000 mortgage (with credit score of 680+), you’d only get approved for approximately $425,000 with a credit score below 680.

So knowing that a good credit score is really important, what are the key elements affecting your credit and how can you improve your credit?

The Seven Rules of Credit

1. Pay Your Bills on Time

– Paying your bills on time, even the minimum payment, is the #1 factor that affects your credit score. Always pay on time, and never be late!

2. Maintain debt below 50% of the limit and always keep debt below the maximum limit at all costs!

– Lenders want to see that you are comfortably within your debt limits. If you exceed those limits, even by $1, your score will drop dramatically.

3. You Must Have Established Credit

– Some people think having no credit is great. But having no credit is like applying for a job with no experience. Sure, you can say that you never made any mistakes at work, but at the same time, you never had a job. No lender will approve a mortgage for someone with no credit.

– The minimum guideline is 2 or more credit accounts ($2,500 limit minimum each)

4. Some Types of Credit are Better than Others

Not helpful: Cell phones, student loans and mortgages do not build your credit

Helpful: Credit cards, lines of credit and loans build your credit

5. Be careful with Joint Credit – Avoid it at all costs

– If you co-sign a loan for someone else, you are legally obligated to repay 100% of the loan. As a result, any debt owing counts towards you 100%. If you help a friend lease a car for $400/month, that will reduce your maximum mortgage budget by approximately $100,000!

6. Closing a Credit Account Lowers Your Score

– Your credit score is affected the most by what has happened in the last 30-days to 6-months

– Once you close your account, all the great payment history you have will become “old news”

7. Don’t Let Someone Else Ruin Your Credit

– If you help someone else get a loan, and they ruin your credit, no lender will care what the “story” is, all they care is that your credit is bad. Don’t put your credit in the hands of someone else and always be careful of identity theft!

Finally, here is the fastest way to improve your credit score:

If you have an old credit card that you never use, buy something with it and pay it off immediately when the bill comes. This will change the “dormant card” to an “active card” and you’ll be considered to have had good payment history since the day you opened the account.

I hope you found this information helpful in guiding you towards improving your credit score! If you have any questions or want to learn more, I’m always happy to help!

Cheers,

Kalson

416-400-3000

Kalson@GTAmortgageAgent.ca