New credit reporting and what it says about you and your spending habits may make all the difference between you buying a home now or later.
When home buyers contact me to apply for a mortgage, I always review their credit report with them along with the rest of their application, before they start looking at homes with a Realtor. If there are any issues with the credit history we can determine the reason, the next course of action and how it will impact financing a purchase.
There is a lot of valuable information in a credit report which provides an overview for lenders about your ability to borrow money. Consistent late payments, collections and bankruptcy have the biggest impact on lowering your score. Running a high balance or over your limit on your credit cards will also drive your credit score down. Scores range from 300-900 and a difference in score by as little as 50 points says a lot to a lender about you as the borrower. For example, a score of 550-599 represents 21% of delinquencies while a score of 600-649 only 11%. Delinquency rates are defined as those who have late payments beyond 90 days. If your score falls from one bracket to the lower bracket with late payments or collections, the difference can affect the interest rate you can receive or, worse yet, if you can qualify for the mortgage amount you need.
The most recent software update for the credit bureau reporting system has added some features which could have a significant impact on reporting. The new reports, which were released in early 2015, show three credit scores and one overall score.
The first score ranks based on open credit and balance to limit ratio. So if you have lots of open credit and your balances are low or reasonable the score is higher. High balances or over limit on all credit cards will drop your score.
The second score ranks based on late payments and collections over $250. If your late payments are beyond 90 days, your score will drop dramatically.
The third score ranks based on the number of third party collections in the last 3 years and the oldest revolving credit. So if you have outstanding parking tickets or an unpaid gym membership that you forgot about — they will come back to haunt you.
These individual scores were created to show specific behaviour by a borrower and if the credit score is trending up or down. This can give the lender an indication of chronic issues with a potential borrower or if they are consistent with their credit usage.
With mortgage payments, lines of credit, auto loans, credit cards and even cell phone bills now reporting on the credit report, consumers have to be diligent with spending and paying bills on time.
I recommend to all my clients to keep your credit report clean — after all, it is your identity.
- Establish at least two trade lines of a minimum of $2,000. One credit card and one personal line of credit for example.
- Maintain lower balances (< 65%) on all lines of credit or credit cards.
- Make payments a few days before they are due to ensure you are always on time
- If you get a parking ticket, fight it and lose – pay the bill and don’t let it go to collection.
- Look at your credit report annually and certainly 3-6 months before making any major purchase such as a car or home. To view your own credit report visit www.equifax.ca.