There are five different categories that go into a credit score:
- on-time record of payment
- the number of inquiries or applications for credit
- credit utilization
- credit history
- credit `depth`
Although it sounds like common sense, the most frequent reason that a person`s credit score is lower (or outright bad) is that they missed one or two payments. A missed payment is a missed payment, regardless if it`s a $15 bill to Sears or a $500 payment to GMAC Car Leasing. Few borrowers realize the effect is the same.
You should also not be applying for credit you do not need. Department store credit cards are prime culprits driving excessive credit inquiries. Is the retail discount worth it? Well, the more times your credit is reviewed, the lower your score.
Your utilization of credit – your balance divided by available credit – is also a major factor. Contrary to popular belief, it`s not based on your balance at the end of the month but your balance outstanding at any given moment in time. I recommend keeping the utilization under 75%, if you want to safeguard your score.
The last factors are long-term credit history and the `depth` of your credit. What I am referring to is someone who has just one credit card versus someone who also has a line of credit and, say, a mortgage. Having a few accounts, of varying types, is good. However, too much credit means that you could, theoretically, get into trouble if you used all available credit facilities. In this case, too much credit can mean a lower credit score and difficulties getting mortgage approval.
A minimum credit score of 600 will get you the advertised rates with a mortgage broker. Banks may be a different story, but brokers can leverage longstanding relationships with lenders. If you`re below 600, be warned you may be forced to go with a `B` lender but there are still options available to brokers which the banks are unable to offer.
On the flip side, there are a couple misconceptions on what doesn`t affect the mortgage rate you can achieve as well, such as the size of your down payment. There is also the fallacy that borrowers often think they can contract a better rate with a better credit score. In most cases, as long as you meet the lender`s minimum, you will get their best rate.
On the whole, abide by the basic borrowing principles discussed above, and you will get the best mortgage rate!
The Albert Pereira Team is with CENTURY 21 Desert Hills Realty in Kamloops, BC.