Thursday, April 4, 2013

Credit Ratings and your Mortgage

If you're shopping for your first house, You'll probably need a Mortgage.
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.
You really have two options: 
  1. Say "No"  (its not worth the risk to loan me money)
  2. 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.
Since the Gambler is charging a huge (in the loan world) premium, He understands that a good portion of people won't be able to pay back the money. So, the "gambler" charges more for this fact, Hoping that if he charges 50%, at least HALF of the people will pay up and he'll make profit. Its hard to find mortgages this way.

So, many years before you buy a house, You want to build up your credit.

Its a scary thing, and a slippery slope for some.

Building up your Credit:

The majority (2/3rds) of your credit rating is calculated by two things:
  • Your Payment History
  • Your Credit Utilization
The Good:
  • 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)

The Bad:
  • 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
  • Bankruptcy

So what this means: Don't go out and rack up a bunch of debt. But get a credit card if you don't have one, and use it like a debit card - Pay it off every month, don't carry a balance. Having a car loan isn't a bad thing, but they'll probably want credit history too. Getting your folks to co-sign can help this - but its not fair of you to ask this of them.

Build History. a GOOD history, of paying your bills, Not maxing out your loans, and staying out of overdraft on your bank accounts.

Now to scenario #2:

You still don't know me. But I come up to you and ask you to borrow 20 dollars.

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!"

So now you know I've got some large, very reputable companies reporting that I'm a sure thing, Have control of my financial standing, and pay my bills. The likelihood of me not being able to pay back my bills/loans is very, very low, compared to the "unknown" who asked you for money the first time.
What does this mean?  You, (or the Bank,) would be much more likely to lend me money, and because It looks like I'm a sure thing (going to pay you back) you'll offer me a low rate, so I'll borrow from you, and not someone else. (so you can make SOME money, rather than none.)

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!


  1. Thank you for sharing this information, Alex! I think it's a great reference for other people looking to buy their first home. The way you explained credit ratings and its relation to availing loans was quite easy to understand, which could make an essentially confusing process easier to handle. I wish I had this to guide me when I was shopping for ours.

  2. The credit score is a number that doesn't really mean that much to a bank, but it is an overall indication of how your credit record looks to lenders. It means a lot at time of loans.

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  3. This post was very useful to me as I am thinking to purchase a new house. Thank you for sharing this information, keep updating.

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