How to create a credit score that will earn you a good mortgage rate
Too many people skip a simple first step when buying a home – checking their creditworthiness.
Credit scores are available for free everywhere these days. And when you check yours, it is very likely that you have a good number that is satisfactory to your mortgage lender. However, a recent survey by credit watchdog Equifax found that 60 percent of people don’t check their creditworthiness before going to a bank or mortgage broker to buy a home.
In fact, waiting until you’re ready to buy is pushing it. The time to check your creditworthiness is when you are first thinking about buying a home. That way, you will have time to build your score so that it will be at its best when you need a mortgage.
According to RateSpy.com, if you have a credit score of 650 or more, you get a reasonably decent interest rate, 680 or more makes things better, and 720 and more gives you the lowest possible interest rate. RateSpy said that a small lender who sometimes has the lowest interest rates on mortgage with default insurance would need 780 or more.
According to RateSpy, the difference between a lowest possible interest rate and a reasonably decent rate could be 0.15 percent on a five-year fixed-rate mortgage, or about $ 55 a month if you bought a Toronto home at the average August price, down 10 per cent.
Equifax numbers show that only 14 percent of Canada’s credit scores are below 650 and that 70 percent are 720 or higher. “In general, Canadians want to keep track of their financial health and that is reflected in the results we’re seeing,” said Julie Kuzmic, director of consumer advocacy for Equifax Canada.
Your creditworthiness is designed to predict the risk to lenders of not paying back your debts in a timely and full manner. A growing number of financial players are now offering free access to credit scores, including many major banks, credit card specialist Capital One, online lender Borrowell, and financial websites like Credit Karma Canada and Ratehub.ca.
Credit scores affect a lot more than your mortgage rate. Ms. Kuzmic said employers use them as part of their background checks on new hires and landlords use them to evaluate candidates for their rental units.
Ms. Kuzmic said the most important factor in building a strong credit score is paying on time, including minimum payments on a credit card. A single late payment – up to 30 days – does more harm to young people with short credit histories than borrowers with a proven grace period.
Be careful when you terminate long-held credit accounts or add new ones, added Ms. Kuzmic. This affects the average age of your debt, which is a factor in assessing your creditworthiness. Getting rid of a longstanding card can bring the average age of your debt down, as can adding a new card.
Student loan repayment is reflected in your credit score, as is your record of paying your cell phone bill. Other utilities – such as electricity and heating – are not included in a credit score.
Building a strong credit rating is one of the arguments in favor of post secondary students having a credit card even when they’re not working and making money. The other reason, by the way, is that credit cards are becoming increasingly important for ordering goods and services online. The downside of starting early with credit cards is that a young person can overpay and negatively impact their creditworthiness with late or missed payments.
Ms. Kuzmic said it only takes three to six months to get a credit score and a similar amount of time to build a low score.
The ultimate credit score is 900, a level the vast majority of borrowers will never reach. Conscientious borrowers, don’t take it personally. Credit scores contain a lot more information than just our timely payment history.
“We tend to think of credit scores like a test result,” said Ms. Kuzmic. “So people who have a 780 feel like what am I doing wrong? A bank or other lender doesn’t care if 100 points are different if those 100 points are 780 to 880. Do you belong to this group? That’s good enough. “
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