Wednesday, November 16, 2005

Your Credit Score - What you should know

Your credit score is an important indicator of your creditworthiness.
The higher your score the better chance you have at getting credit extended you. While many lenders use bureau scores to help them make lending decisions, they also take other aspects into consideration.

Lenders will use your credit score to determine if you are likely to pay your bills and also help them place you with the appropriate repayment plan. For example if you have claimed bankruptcy in the past they might place you at a significantly higher interest rate.

The following is used to calculate your beacon score:

Payment history- This indicates if you have made your payments on time
Amount owed - Comparison of what you owe to your credit limits with various lenders
Length of time - This indicates how long you have had credit accounts
New Credit - Shows how often you are looking for new credit
Type of credit - Considers the type of loans you have - car loans, lines of credit, credit card balances
I can't stress the importance of keeping your credit clean and checking your report periodically. This could mean the difference of thousands of dollars when you apply for any kind of credit including a mortgage.

Common mistakes that are made:
From my experience I have seen time and time again, where a client has applied for credit through more than a few lending institutions because they keep getting turned down. This is a common mistake, what they don’t know is that this significantly impacts their credit score negatively. When you have too many inquiries you are basically shooting yourself in the foot. You are guaranteeing yourself a higher interest rate and increased cost for lending. The next lender can see that you applied at "so and so's" and they turned you down. The best way to approach this situation is to find out why you where turned down the first time. Finding out can be a little difficult if you don’t know how to go about it. Most of the institutional lenders will be very vague in explaining why you where turned down, they have policies in place to limit the information they can give out to their clients. There is a way around this, check your own credit score through Equifax periodically to make sure everything is up to date and correct.

You can get your credit report from one of the two credit Bureaus in Canada
Equifax
TransUnion

They charge a small fee of $14.50 CDN but well worth it to save you frustration down the road. Make sure that your credit report shows what accounts have been closed, what has been paid out and your report is current. After all these things are taken into consideration when you are applying for credit. If you need help understanding your credit report, believe me it is confusing to most at first, contact your local credit counselor and I am sure they would be happy to walk you through it.

This link might be helpful, it is a non- profit credit counseling service


What can I do to improve my credit score?
Pay all your bills on time. Paying late, or having your account sent to a collection agency has a negative impact on your credit score.
Try to keep your balances under your credit limit. Keeping your account balances below 75% of your available credit may also help your score.
Avoid applying for credit unless you have a genuine need for a new account. Too many inquiries in a short period of time can sometimes be interpreted as a sign that you are opening numerous credit accounts due to financial difficulties, or overextending yourself by taking on more debt than you can actually repay. A flurry of inquiries will prompt most lenders to ask you why. However, most scoring formulas will not penalize you if, for example, you are shopping for the best mortgage rate or the best car loan.
The long and short of it is that if you keep your payments up to date for 6 months - 1 year you have a better chance for getting approved for credit, lower interest rates and all around better deal.

Bankruptcy, collections = bad credit
Having bad credit is not the end of the world
If you happen to have any previous collections or even a past bankruptcy the best way to get back up is to re-establish your credit.

There are a couple of options here Home Trust

Good luck and have a great day,

Rachelle Czartorysnkyj Your Mortgage and Finance Specialist www.MortgageSourceCanada.Com

4 comments:

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