December 8, 2010

What Exactly is a Credit Score?

by Mandeep Tatlay

Well first off, a credit score is not a summary of your credit as it is today but is a prediction of how likely you are not to pay your debts over the next two years. The lower the score, the more likely you are not to pay your debts in the future and from the lender’s perspective you are considered higher risk. As a higher risk client, you are more likely to have your mortgage application denied and/or receive higher interest rates.

Most Canadians don’t know their credit score or how it is determined. Below I outline information on how you can start taking the right steps towards a better credit score today. What this means to you is that lenders will want to lend you more money and at better interest rate.

Find out your credit score
Credit scores range from 300 (poor) to 900 (excellent). To find out your credit score you can purchase your credit report at www.equifax.ca or www.transunion.ca. If you plan to purchase or refinance you can contact an accredited Mortgage Broker (AMP) who can pull your credit report for free.

What’s your Payment History?
Payment history accounts for 35% of your credit score so it’s important to pay your bills on time! If you are paying bills online send the payment in at least three banking days before it’s due to avoid it being processed late. Helpful tip: set up a small automatic payment to your credit card issuer each month in order to ensure that at least you are paying the minimum amount, thus avoiding any impact to your credit score.

Avoiding Debt
How much you owe accounts for 30% of your credit score. The below points outline how to manage your debt and maintain a high credit score.

• Never exceed your credit limit. Going over your credit limit doesn’t just result in costly fees but it also hurts your credit score.

• Avoid applying for store credit cards. Each time you apply for an in store credit card there is an inquiry about your credit score. Inquiries are viewed negatively by credit bureaus and hurt your credit score.

• Try not to max out a credit card; instead, distribute your spending. It is better to have two credit cards at 50% capacity than one that is maxed.

• Don’t close unused credit cards. Having a zero balance credit card actually helps to improve a low credit score.

• Don’t apply for too much credit all at once. The credit bureau will look at too many inquires as a sign of financial trouble even if your inquiries are different (for example: car lease, new cell phone, line of credit etc.).

Beware of Pre-Approvals
Being pre-approved by several lenders before you’re ready to buy can also hurt your credit score. Therefore, by trying to shop around for a rate yourself, you are actually hurting your own credit score. Going to an Accredited Mortgage Professional means you have one credit report being pulled, which can be used by the mortgage representative on your behalf at numerous lenders.

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About the Author

Mandeep Tatlay, an Accredited Mortgage Professional, has become a recognized name in the Greater Vancouver mortgage industry. She is considered Greater Vancouver’s mortgage expert and her expertise range from refinancing mortgages at the lowest rate to working with credit challenged clients. As an Accredited Mortgage Professional, she helps individuals get the best mortgage at no cost to them.

All mortgages are not created equal and based on your circumstances, one mortgage could be much better for you than another. For more information visit www.mandeeptatlay.com.