If you need a Mortgage, you'll need Credit History. The more (positive) credit history you have, the better your rates and credit score will be.
Pretend (or know) that we don't know each other:
- I come up to you and ask to borrow 20 dollars.
- You ask around, and nobody has ever heard of me before. You have NO idea if I'm good for the money.
- Say "No" (its not worth the risk to loan me money)
- Say "Yes" but I've got to pay you back 30 dollars, even though I'm borrowing 20.
- The smart person would probably make up some bull excuse about how they have no money right now, or how they happened to "forget" their wallet at home.
- The Person who's willing to gamble a bit would say Yes.
Building up your Credit:
- Paying all your bills on time
- Using your credit, but not exceeding 50% of your available limits.
- Car Loans that are paid off/being paid off.
- Having Cell Phone Bills, Utility companies that you pay regularly.
- Having a Long Credit History
- Installment Loans (not revolving)
- Late Payments
- Missing payments
- Lots of "revolving" credit. (Lines of credit, Credit Cards)
- Too many Credit Cards
- Lots of "new" credit
- Maxed out Credit
- Excess Credit Limit Increases
Now to scenario #2:
You ask around, and:
- Visa says: "Oh yeah, He's used our visa card for 8 years - Never late!"
- My cell Phone provider says: "Loyal customer for 6 years - Never late!"
- My bank says: "He's been here for 15 years and is in good standing. No Bounced Cheques. - He's not going anywhere any time soon!"
Credit/Credit Cards/Loans is a scary thing, but a necessary evil if you ever plan on getting a mortgage. The more positive history you have, the better your chances at being approved for a Reasonable amount based on your Income. If you have a prefect credit rating - You're not going to get a $1,000,000 Mortgage if you only make $50,000 a year!
Credit Ratings and Mortgage Shopping - Checking your Credit can lower your score
Checking your credit rating every now and then (once a year?) won't effect your rating - Checking it every 2 weeks will. it sends the "this guy is in desperate need of a loan" vibe that scares lenders off. However, when you are mortgage shopping, each company will need to do a credit check - Transunion and Equifax (the two main credit history agencies in Canada) know this will happen, so what happens is once you have 1 credit check, for the next 14 days, following credit checks won't impact your credit rating - so when you go mortgage shopping, use a broker, or go from bank to bank and rate-shop within a 2 week window. As a rough rule of thumb, excess credit checks can reduce your rating around 5 points each. The 14 day window prevents this from happening.
Getting your Credit Report:
You can get a credit report for free by mailing Equifax for it. Or if you are impatient, you can get it for 16 bucks online instantly. This is just a report, which is super useful in seeing if you have any accounts open you didn't know about, or Fraud, etc. It also lets you dispute negative marks against your credit - If a company wrongly charged you and flagged you for unpaid bills, etc.
However, most people are looking for that magic number - whats my credit SCORE. This number doesn't really mean ALL that much to a bank, but it is an overall indication of how your credit "rep" looks to lenders. Ideally, you want to be above 760 out of 900 on equifax. Just over 50% of all Canadians are in this range, and its the best place to be. Anything lower, and there's a chance you won't get the "best" rates from a bank on a loan/mortgage. A credit Score is about 25 dollars to get, and includes the credit report.
I make a habit of getting my report/score once a year - Mostly because I've moved so many times in the last few years, I want to make sure no companies out there are slandering my credit history or kept accounts open I don't know about. It also tells you who has "probed" your credit (which can scarily be done without your consent), and who has done a full credit check on you in the past few years.
Bottom line - You need credit to build credit - Just don't dig yourself into a hole!
As always, if you have any questions or comments, let me know in the comment section below!