9 Easy Steps to Building Your Credit
You find the perfect property, put in an offer, and learn that it has been conditionally accepted. Things are looking up! Next, you go to your mortgage broker for financing. Unfortunately, they report that you’ve been declined by the bank because your credit score wasn’t high enough. Now you’ve got a problem. You ask yourself: “How could something as simple as a credit score, prevent me from attaining my investment goals?”
Trust us, you wouldn’t be the first person to ask that question. That’s why, as a Mortgage Brokerage, we like to educate our clients on the importance of maintaining a healthy credit score before you start the search for your dream property.
Get set up for deal-making success
Whether you are a first-time buyer or an experienced investor, your credit rating plays a major role in whether or not your deal is approved by the bank. Thankfully, there are a few instrumental steps you can start taking now, to ensure that you are building and maintaining that desirable credit score lenders are looking for. That way you’ll be set you up for success when it comes time to sign on the dotted line.
9 ways to build and maintain a healthy credit score
1. Pay your bills on time
Promptly paying your bills demonstrates to lenders that you are credit worthy. By paying all bills on time (including but not limited to credit cards, phone bills, car loans, student loans, rent, and utilities), you are creating a profile which positively impacts your credit score. Late or missed (delinquent) payments will negatively impact your ability to qualify for future credit vehicles. These delinquent payments can stay on your credit report for up to seven years and can be difficult to resolve.
Key takeaway: To a lender, past payment performance typically is an indication of future performance. Credit repayment weighs heavily when assessing qualification for a new debt. Automatic withdrawals and calendar reminders are great tools you can use to ensure payments are made on time each month. Tip: If you can’t afford to pay off a credit card balance in full, try at least to make the minimum payment along with an extra $50 – $100.
2. Don’t apply for too much new credit
For lenders, an abundance of credit queries on your credit report signifies one thing: too many hard inquiries. A hard inquiry is what appears every time a credit company pulls your score. Too many inquiries can raise a red flag, since it may look like you’ve overextended yourself credit-wise or are being declined on multiple credit requests. This could be the case if you are rate shopping for a new mortgage for example.
Key takeaway: A few hard inquiries will not be detrimental to your credit rating, but as a rule of thumb, be cautious of how many times your credit is pulled, limiting whenever possible.
3. Check in on your credit report
Even if you are not considering a real estate purchase until well into the future, a self-check on your credit history once or twice a year is a great idea. Why? It isn’t uncommon for people to discover errors that can subsequently lower a credit score and impact your qualification potential. Common reporting errors can include:
- Mistakes in your personal information—wrong mailing address incorrect date of birth, etc.
- Errors in credit card and loan accounts, such as payments marked late that you actually made on time.
- Missed or delinquent payments still listed on your account after the maximum years they should appear.
- Personal accounts listed that you never opened—a possible sign of identity theft.
Key takeaway: By reviewing your report, and resolving any errors ahead of time, you can strengthen your credit, improve your ability to qualify for a mortgage, and avoid any unpleasant surprises when submitting to a lender. There are some excellent credit reporting agencies such as Equifax and Transunion that for a small fee, will allow you to “soft” pull your credit, giving you access to your own credit report with no negative impact to your score!
4. Pay first – dispute later
Fraudulent credit card charges can be alarming. Your first instinct may be to dispute the charge and launch an investigation. It’s important to note however, that refusing to pay the charge during an investigation can still result in late payments and interest charges that can damage your credit.
Unless the charge is excessive and potentially criminal, a more credit-friendly approach is to pay first and dispute later. Credit card companies are very good at rectifying errors, but the process can take some time. You do not want any erroneous charges accumulating interest and creating delinquencies while you wait.
Key takeaway: When disputes arise, pay first and then dispute for reimbursement later. Don’t allow your credit to be negatively impacted over a fraudulent charge.
5. Don’t close unused credit cards
You’ve paid down a credit card and want to close it out. Not so fast! Keeping unused cards open can lower your credit utilization ratio. This means on paper you’re doing a good job of keeping your debt-load in check.
Here’s how it works. If you owe 10k on one credit card with a 12k limit, your ratio is high. If you owe that same 10k on the same card, but you’ve got an additional 20k in unused credit on two other cards, your overall debt ratio is much lower, and deemed more favourable from a lender’s perspective.
Key takeaway: As long as credit cards aren’t costing you too much in annual fees, consider keeping them open. This will increase your credit utilization ratio and strengthen your position when it comes to qualifying for a loan.
6. Diversify your credit
Many people use only one credit card and pay it religiously. As prudent as this might seem, many of these same people are surprised to find their credit rating isn’t as high as they thought. Why? Maintaining a mixed portfolio of credit types—credit cards, line of credit, car loans, even utility & cable bills, etc.—may improve your credit score.
When it comes to assessing loan suitability, lenders like to see an array of credit products. If your credit report is too “thin”, (limited to one or minimal credit products), lenders may see that as a risk given limited overall history.
Key takeaway: If possible, responsibly maintain multiple types of credit. A diverse credit portfolio can improve your overall strength when it comes to applying for your next loan. (Keep in mind, the strategy falls apart if you take on too much debt, so be careful!)
7. Know your limit and spend within it
Many people negatively impact their credit rating by unknowingly over-utilizing their available credit. As a general rule of thumb, keep your spending within 70-75% of your maximum credit allowance, including interest.
When you max out a credit card or keep a line of credit close to its limit, lenders start getting concerned about your credit utilization. Not to mention the fact that you risk going over your limit once interest charges commence. Some tips to keep balances from getting too high are:
- Pay more than the monthly minimum to decrease balances.
- Request a card limit increase, without increasing your spending.
Key takeaway: Strengthen loan applications by using only 70-75% of your available limits on cards and lines of credit. This shows lenders you’re not only capable of handling your current debt load but are also capable of responsibly taking on new debt.
8. Be cautious when co-signing
It is important to exercise caution when agreeing to become a guarantor/co-signor on a mortgage or other debt instrument. You cannot control another person’s spending or payment habits. Delinquencies resulting from a co-applicant can have a detrimental effect on your credit score.
Key takeaway: Be mindful when co-signing a mortgage application and the potential implications this could have to your credit score. This could also restrict your ability to qualify for other mortgages and loans in the future!
9. Increase the length of your credit history
Finally, we come to one of the key components of any good credit score—your history. The longer you can maintain a credit account, the better it is for your score. Due diligence over time is exactly the sort of trait lenders are looking for when reviewing your report. The longer you own any particular credit card or keep a line of credit open, the better it is for your score. The key here is keeping those credit vehicles clean.
Key takeaway: Consider keeping older accounts active, even if you don’t use them all the time. Established credit demonstrates strength to the lender, which contributes towards keeping your score as high as possible.
Solid score, solid prospects
Follow all the steps above and you’re well on your way to a solid credit score. That means you’re also on your way to getting approved for a mortgage on that property you’ve had your eye on. Great work! Now, start making those dreams a reality.