Credit scores and finding a mortgage

Your credit score is a three digit number used by credit reporting agencies to represent your credit history.

The score can range between 300 and 900, the higher the better. Its point is to determine how likely you are to be making future payments based on the historical date provided to the reporting agencies via the lenders you have or had credit with.

If you want to purchase a new home, it’s imperative that you have a good credit score in order to get the best possible mortgage, not only just a good rate but a flexible mortgage as well. There are many misconceptions about the numbers mean and what it takes to get and maintain a good credit score.

Myth 1: You must use major credit cards to build a good score. Truth: If you are unable to obtain a major credit card because you are new to Canada or just beginning to establish your credit, there are other ways to obtain and build a credit history. Secure credit cards, whereas you provide the credit card supplier with an upfront deposit and they provide you with a card equal to that deposit. RRSP loans are another great way to build credit. I’ve found that lenders are easier to secure lending with if they are securing their own cash.

Myth 2: You must max out that card and pay it off every month for it to report a good history. Truth: This is the worst one yet. Quite often I have clients that come in to apply for a mortgage to find out that even though their balance is $900 on a $1,000 card but they pay it off every month because some credit genie told them that’s how they need to establish credit. Reality is that as long as there’s a payment registered to the loan that month, it will report as satisfactory. Meaning, if you used the card only once that month for $30 for fuel for example, then paid it off at month’s end, and then the lender will report a payment was made. The worst things you can do is rack up your balance every month and hope to pay it off so that your credit score goes up.

Myth 3: You can’t make up for mistakes such as late payments. Truth: It takes time but your credit score will eventually become stronger the further you are away from the last late payment registered on your credit bureau. Making timely payments is the only way to maintain a high credit score, but if you have slipped up and paid late, the best way to recover is to pay all outstanding bills and work to pay down your balances.

Myth 4: I will not qualify for a mortgage if I’ve had poor credit. Truth: Not necessarily, lenders look at your entire financial snapshot, including net worth, saved up cash and debt-to-income ratios, which describes what you can afford.

It’s very important to understand credit, since we live in a credit world. But you must also have a grasp as to the entire financial picture, because it’s not just good credit you need, but also an entirely healthy financial world.

Jean-Guy Turcotte is an Accredited Mortgage Professsional with DLC Regional Mortgage Group.