Credit 101 – the ins and outs of a credit history

BY PAM PIKKERT

At long last you have enough money saved for a down payment and you are ready to start house hunting.

Hooray! You call a mortgage professional and set up an appointment and then you get that horrible sick feeling in your stomach.

You know that you need to have good credit and think you should but how can you be sure? All of a sudden your mind floods with that one time you paid your credit card late and you are now terrified that this will hold you back. Well good friend, our goal this week is to remove the veil of mystery that seems to surround the credit system.

How the heck does credit work anyway?

Let’s begin at the very beginning. There are two credit agencies in Canada to whom all credit providers report you and your habits to.

They are Equifax and Transunion.

These two companies take the information they are given and use it to compose your credit score or rating. Think of your credit score just like a report card. You can improve your credit score and you can cause it to drop through your habits. The range is typically 400 to 900. Generally anything over 680 is considered to be excellent credit.

Your score is based on a number of factors:

Payment history – Pay your bills on time. That’s it and that is all. Just do it!

Everybody should note that cell phones now report too so make sure those get included in things to pay on time.

The amount of credit you owe – how much credit do you have available to you? Is $50,000 on your line of credit a necessary amount? At the same time, can they really get a clear picture of your money management skills if you only have a $300 limit?

Credit usage – your credit score could drop if you owe more than 50% of the available limit.

Credit experience – how long have you had your loans? The longer the lenders can see a history of good repayment the better off you are.

Acquisition of credit – how many loans have you applied for? A high number of inquiries by potential lenders can be a red flag and cause your score to drop dramatically. Exercise caution and make sure that a credit inquiry is necessary.

Types of credit established – it is good to have a mix of revolving and installment loans. An example of a revolving loan is a credit card. The balance can fluctuate and you are able to choose how much to pay each month. An installment loan would be a vehicle loan with a fixed payment each month.

So your grandma Beth has been warning you for years about the danger of credit.

But listen up, she was wrong! (No offense Grandma Beth). Credit is necessary and should be viewed as a tool and not a nuclear weapon. How in the heck can a lender decide to lend you $250,000 for a new home if they cannot see how you have managed to pay back your other bills? Your best bet is to make sure you have two credit companies reporting your amazing repayment history at any time.

One for sure should be a credit card. Get it, use it and then for goodness sakes pay it off! The other can be a car loan, a personal loan, another credit card – you get the idea.

It is a very good idea to check your own credit every so often.

You can order your report online for a cost of about $25 at Equifax.ca or Transunion.ca.

It will show you immediately your score, who has been looking into you, show a seven-year history of your financial abilities. It is a great opportunity to make sure that everything is correct. Mistakes happen and you just want to make sure they didn’t happen to you.

If you see a mistake, be sure to take the time to get it fixed! You can also get a basic report for free by mailing in a request to other of the companies above. A quick Internet search will show you how.

And what if you have pooched up your credit epically? First of all, you are not the first person to do this and you won’t be the last but things will be harder for you, my friend.

Pay off your bad debts.

Just because the credit provider has written off the account does not mean you don’t have to pay them back.

Look at your credit bureau and make sure you do not have any outstanding collections.

If you do, pay them! Are you seeing the theme here?

Get yourself two new things to report on your behalf. You can start with a secured credit card if you need to.

Pay your new debts on time, every time. Even one late payment will be horrible for you in your attempt to re-establish yourself. You will need at least two years of this new credit-worthy behaviour to prove yourself but you can do it and it is worth it!

So that is credit in a nutshell and I hope it is a little bit clearer.

Until the next time my mortgage minions!

Pam Pikkert is a mortgage broker with Dominion Lending Centres – Regional Mortgage Group in Red Deer.

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