My clients ask me every day, why they don’t qualify for the mortgage rates advertised. I hate being the bearer of bad news, and hopefully this article will clear the air if you have questions, or give you the knowledge to share this with others who need to know.
I can’t emphasize enough the importance of maintaining credit and keeping it up to date. Almost all credit guarantors and lenders will check your credit before issuing any sort of loan and credit; that includes mortgages, lines of credit, car loans, short term loans, credit cards, etc.. Credit must be in tip top shape to receive the best interest rates on products offered. At the moment Equifax and Transunion are the two companies managing credit bureaus for consumers. Do those names ring a bell? Both Equifax and Transunion updates consumers bureaus on a monthly basis; increasing or decreasing beacon/credit scores based on the consumers’ payment habits. Beacon scores range from 300-900. The higher your beacon score, the better a position you’re in to get a better interest rate on the product you’re seeking. The lower your beacon score, the higher an interest rate you’ll pay… if you’re approved.
If your beacon score falls on the lower end of the spectrum, you’re NOT at the point of no return. Follow these tips religiously and you’ll be able to improve your credit situation. This isn’t my rule of thumb, this is a universal guideline that just isn’t easy to find… so if you didn’t know this before, don’t feel bad.
Tips to improve your beacon score:
1. Pay your bills on time. Sounds simple enough right? Yet many people neglect to do this. If you have missed payments, get current and stay current!
2. Keep balances low. That doesn’t mean keep a balance at zero. It’s okay to owe the creditors, just don’t max out your available credit. Continually owing a balance of zero is called ‘playing the system’ and the system isn’t ‘stupid’ for lack of a better term. Owing a little is not a bad thing.
3. Pay your debt rather than moving it around. You’re only tricking yourself by doing this.
4. If you must carry a balance month over month, just keep it to 75% of total available credit.
5. Don’t close unused credit as a short term strategy to raise your credit and beacon score. This doesn’t work in your favour.
6. Don’t open numerous new credit cards that aren’t needed as a way of increasing your available credit. Each new inquiry takes a hit on your credit and you don’t want to seem credit needy.
7. Limit the amount of inquiries to your bureau. Once again, you don’t want to be tagged as credit needy.
Furthermore, if you’re curious as to what the breakdown of your credit score is, it’s based on a number of factors:
Credit score breakdown:
35% – Payment history (Most important! This tells lender whether you pay accounts on time)
30% – Balances owing (Owing money on accounts does not make you a risky borrower! Owing a lot on many accounts does)
15% – Length of credit history (A longer credit history will increase your score)
10% – New credit obtained (High inquiries in a short period screams ‘greater risk’)
10% – Types of credit in use (Mix of credit – Mortgage loan, finance company loan, retail cards etc.)
As you can see, it is important to first understand how the credit system works in order to then understand how to go about achieving/maintaining a healthy score.