Continued from: Understanding Your Credit Score 1 of 2
If you have had any of your debts taken to court or collections these would be listed in the public records section. If you had a bankruptcy it stays on your record and is considered for 10-13 years (depending on the type). Included would be any settlements against you, municipal taxes owing, or other judgments. These remain on your record and are considered against you for 7 years. This part you basically want as clean and empty as possible.
At the end of your report is your notes section. If you find any problems with your report you can have a note put into this section to clarify info. For example if you had high credit card debt in college ten years ago and it no longer applies, that may help. If a lender pulled your report without permission, that can be included. The reporting agency will need proof of your ID and proof of any error to correct or update your file.
Your FICO score goes down approximately 5 points for every inquiry into your report. Under two circumstances do hard inquiries not affect your score: when the inquiry is made by you, or it is for multiple mortgage product inquiries within a month span of each other will be counted like one (1) single inquiry. When declined credit you have the right to know why and which bureau provided the information. Write to the lender and follow-up, be diligent.
Manipulating your credit score is all in the timing. If you need to open a new account do it strategically a few months ahead. Pay off any higher balances down. This means things that have a larger part of the credit borrowed or are at a higher interest rate like credit cards. Try not to apply for many different products at once or once every 2-3 months. Build the current credit relationships before expanding and seeking more. Avoid department store credit cards if you already have established credit. Responsible use of credit is when necessary not when wanting.
Establishing credit when you do not have a history may be difficult. The first thing you should do is get a checking account and a savings account. These will help in establishing a history with your bank and updates your records. Learn to budget and track expenses. This will help you make smart financial decisions in the future and be responsible with money. Track to see if you have any patterns like “latte factors” or daily habits that you can cut out and save money on. Remember $2.50 a day on coffee and donut is $912.50 and a years’ worth of calories. Be smart.
Credit card companies usually are reluctant to lend money to people without credit, so how do you establish yours’. It usually goes to target markets. Students, business people, and other demographics extended credit on certain terms. The general public can apply under tighter qualifications. The lenders are usually banks, large corporate organizations, and department stores. Department store cards are only good if paid off in full right away, otherwise your savings is eroded by interest. However they are very good starting cards with low limits, but high rates.
Another way is to get a secured credit card or line of credit. It works like and is the same as a Visa or Mastercard, however you put down a security deposit between $1,000-$10,000 or more. I recommend you start small and work up. This money is put in a safe investment like a GIC so you are earning interest. Any money you use, up to your limit is the loaned to you at an annual rate. It may seem weird to let someone hold your money to lend it back to you at interest but that is what banks do, without you knowing. In either case you are paying for the privilege of having a credit card that can be used for emergencies and helps establish credit. These companies will usually charge a set up fee and a monthly fee as well. They will however report monthly, because they are getting paid a fee for this service.
CapitalOne MasterCard and HomeTrust Visa are two companies that offer products in Canada. I would recommend both for consumers looking to build credit. During tighter lending conditions most applicants will need to have two (2) or more trades or credit products on record in good standing to qualify for unsecured products. The longer you keep these cards the better, establishing a good strong history. Most companies can receive applications by mail with proof of ID and certified deposit. HomeTrust also has home equity products for future home buyers that look great for mortgage lenders. The websites are http://www.capitalone.ca/ and http://www.hometrust.ca.
A new way being experimented in the United States is a self reporting system. It starts keeping a record on its own, which you verify thru receipts and bank statements. These records are available to lenders to use, but you pay for your part of the maintenance. These generally track rent, phone bills, utilities, etc. It is a new an interesting idea and hopefully will spread from the traditional system as it grows in popularity.
Another way to establish credit is to co-sign. It is usually done with parents for kids’ tuition, first home, loan, or guarantor. This type of arrangement puts the financial burden on the parents since the kids are not of age. When a co-signor signs for an adult, they assume that debt on their behalf should the original lender default. Make sure your own financial situation is stable before you co-sign for someone, or ask someone to co-sign for you. Two families are a heavy burden to carry should an unfortunate event occur.
Life and the economy are not perfect and it is important to take that into consideration when dealing in financial matters. It pays off in the long run to be debt savvy. Avoid taking on and pay off bad debt or consumer debt first. This is bad debt as the items purchased like jewelry, cars, furs, and electronics have probably devalued and are worth less than the debt itself. Also it has no long-term value usually and is hard to liquidate. Credit card advances are not a good practice to develop. Good debt is usually cheaper as mortgage rates are a quarter of the credit card rates, and it has physical value. Your home is probably not going to have a large drop in value and over time it appreciates without you paying rent.
Should you run into some bad luck and have financial difficulties, don’t panic. You should usually have about 6 months reserve in your savings. If you lose your job and have a hard time paying, keep the minimum payments. A month or two before you start running low on funds, contact your lenders and advise them of what is going on. They may give you payment breaks and work with you. Banks rather see you keep your home than foreclose. Let them know that as soon as things change you will catch up. Be responsible, don’t hide from it. If you miss a payment call the company and explain what happened. Most credit card companies give you one free missed payment per year or two. Set up authorized withdrawals to make payments worry and hassle free.
Get insurance to cover yourself. If you lose your job or get sick, mortgage creditor insurance can protect your payments and your home. If a fire or flood damages your home, you will be protected and have a place to stay. Should you no longer be able to work, your family will be safe. Contact your insurance professional for adequate coverage. Don’t forget your home and auto.
Struggling with debt can be a hard fact to face. Many people will deny and deflect their problems till it is too late. If you notice signs, take immediate action. Trouble signs are in the air when you notice your only making minimum payments, borrowing to pay, two jobs, overtime, late payments, pay checks disappear, spending savings, and new purchases on your bills. Consult your bank or lending consultant to find out what your options are. Consolidate your bills, pull out equity, or take a 2nd mortgage. As long as it makes sense for you and you are 100% sure with your decision.
Once you have gotten deep into debt, your last step before bankruptcy may be to see a credit consultant. Use a referred source that has been tested by a friend or family member. Be careful of products offering quick fixes and unbelievable results. Such services are usually charged a hefty upfront fee. Your experience and results should be your guide in whether you received the service you wanted.
Bankruptcy is the final step in a person’s credit woes. This usually involves a few lawyers and a great deal of paper work. Bankruptcies are hard on families, as reputation, lifestyles, and homes are ruined. Creditors get their priority on assets before anything is left and returned to the owners. After a bankruptcy settlement is reached, it stays on your credit record from 10-13 years.
Now let’s look at the five characteristics lenders consider in granting credit with regards to mortgages. I will explain what logic and reasoning lenders consider. The first thing that lenders consider is called “the 5 c’s”. This includes capacity, capital, character, collateral, credit. Capacity asks if the applicant has the financial means to pay the mortgage. This looks primarily at earnings and provable income. Capital is any other assets that the applicant has. Character asks if your personality shows you can and will make due on your obligations and responsibilities. Collateral looks at the value, condition, area, and hazards associated with the mortgaged property. Finally credit, shows the applicants past tendencies in using credit and financing.
The final aspect lenders consider is the debt ratio compared to the persons’ earning. GDS (Gross Debt Service Ratio) measures what percentage of your income goes to covering your mortgage debt which is Principal, Interest, Taxes and Heating. You ratio for this cannot be more than 32%. of your monthly income. – TDS measures what percentage of your income goes to cover your total debt. This cannot exceed more than 40% of your monthly income. This includes mortgage payment, taxes, heating, car payments, credit cards, line of credit, spousal support, alimony, etc.
When applying for a loan, make sure you have the necessary documents. Usually any tax assessments, pay stubs, bank account statements, notice of assessments, T1 general, MLS listing, two (2) pieces of ID, closing date, confirmation of down payment and cost of taxes and heating costs. Having this ready will make the process smoother and stress free. Most lenders require literally seconds to approve deals once all the documentation and paperwork is submitted and obtained. Once you have your mortgage, enjoy your home, and build your wealth. Congratulations, you have made it to home ownership.
Equifax Canada Inc
Consumer Relations Department
TransUnion of Canada
Consumer Relations Centre
P.O. Box 338 LCDI
Experian Consumer Relations