by Steve Cook
Occasionally, a home buyer walks into a real estate office with a rotten credit rating and confidently promises to fix things up before they apply for a mortgage.
That’s never a good sign for first-time buyers, who may hunt four months or more to find a property they can afford to buy.
The last-minute credit crushers, who believe they can make up for years of neglect and irresponsibility, are in for a rude awakening.
Welcome to the age of trended credit.
Today’s algorithms measure credit over the years, not weeks. Three to six months of angelic behaviour doesn’t erase the past.
The average credit procrastinator will have to pay the penalty for past sins. That said, it’s still a good idea to get credit scores up, and it’s an even better idea to keep them there. Here’s six tips:
1. Stay below the 30-per-cent threshold — A little alarm bell goes off in the credit bureaus that keep score on credit behaviour when your balance on a single card hits 30 per cent of your approved amount.
Many borrowers think that they can fill their cards close to the approved limit and all will be well. Wrong. Your credit score takes a hit the minute you hit that 30-per-cent mark.
Review your credit cards, and be sure you are below that mark on all of them.
2. Pay more than the minimum — Ain’t revolving credit great? You can buy a suit for $800, but you’ll only get a bill for $50 a month; that is, for a very long time.
Minimum payments are seductive and nasty, because if you just pay the minimum, you aren’t paying off your debt, just the interest on your debt.
The principal will still be there the next month and the month after that.
Over time, you are making your lender rich. Paying the minimum is better than paying late or not paying at all. But it’s like treading water.
On the other hand, if you pay more than the minimum every month, even if you pay just a small amount over the minimum, you are moving in the right direction. They call it trended credit because it’s the trend that counts.
3. Close accounts you don’t need, except for your oldest — There is such a thing as having too much credit, especially if your available credit is out of proportion with your income. Lenders are conservative people, and they don’t like the idea that a borrower might go wacko and use all the plastic in their wallets.
Then they might not be able to pay the mortgage. Close out those dusty cards in the top drawer of your dresser, and don’t apply for new credit until you can afford it.
However, always keep your oldest card and pay it off promptly whenever you use it. Lenders like to see responsible behaviour over a long period.
4. Get help to make sure you pay on time — There’s no excuse to miss a payment or make a late payment today.
Sign up to receive a notification from your creditor or your bank.
When you are trying to get in shape to buy a home, you simply cannot afford a late payment — ever.
5. Consolidate your killer accounts — So you got six months credit free or cash back for a year when you signed up for some of your cards. Now the grace period is over, and you’re getting socked with an APR that would make a rich man howl.
Find another interest free card, and pay a modest transfer fee. Or take out a low interest personal loan, and pay off your balance. Then close out those toxic accounts.
Sure, you still owe the same amount of total debt, but now you have a fighting chance of paying it down. Which you will, won’t you?
6. Reintroduce yourself to cash — Some financial advisers tell you to hide your plastic in a drawer and live on a cash basis. They are like weight loss gurus who say you must live on kale and wheat germ if you want to lose weight.
It just ain’t gonna happen for young Canadians raised in a society where you can buy stuff with a smart phone. So don’t go totally cold turkey.
Withdraw a limited amount of cash each week, and use it to buy the gas, groceries and other daily stuff you used to buy with plastic. Make a game of seeing how far and how long you can stretch your weekly cash.
You’ll find you spend less and add less debt.
Another tip: After you’ve sacrificed for many months to put a shine on your credit score and you’ve saved for a down payment and closing costs, the finish line is in sight.
With a U-Haul and a little help from your friends, you have the move under control. You are handy enough to make your new home feel like it’s yours. Your mortgage is approved and closing day is here.
Don’t even think about breaking out the plastic for a big purchase before everything is signed and closing is complete.
More than one lender has checked a borrower’s credit the night before closing and cancelled the loan if new debts pop up or a score plummets suddenly.
Credit rating score
According to Equifax Canada, as reported by Canadian Press, payment history is the biggest component of any score (35 per cent), with the payment rating ranging from zero to nine, with zero being a new account:
• Paying within 30 days gets you an R1.
• You move down to R2, if you are between 30 and 60 days past due.
• After 120 days past due, you drop to R5 — a point you don’t want to reach.
• It goes downhill from there until you reach R9, which closes your account for non-payment.
The credit score range in Canada is 300 to 900 — the higher, the better. A good score is 760 or more, while anything less needs to be improved.
Your credit score takes into account how well you’re paying for your cellphone, along with your credit card, your installment loan, your car lease, your line of credit and your mortgage.
— Inman News and Canadian Press.