Have bad credit? Don’t panic. Take the bull by the horns instead! I have had clients raise their scores by 150 points in 18 months using these methods. Fixing credit takes strategy and discipline. You will first want to see what, if anything, the lenders are saying about you. That kind of information is contained in your credit report at major bureaus: Equifax for a fee of $24 or Credit Karma Canada for free although not always accurate. Credit reports are used to create your credit scores, the three-digit numbers that lenders typically use to gauge your credit worthiness. Lenders may also look at the reports themselves, as may landlords, employers, insurers and utility companies who use credit to evaluate applicants. Can you have a credit report if you have never had credit? Maybe Somebody else’s information could be mixed in with your report, either through a credit bureau mistake or because of identity theft; i.e. someone using your personal information to open bogus accounts. If that’s happened to you, you will need to clean up your credit report before trying to apply for new accounts.
The Federal Trade Commission’s identity-theft site has information that can help. You need to know that the two most important factors in your scores are:
•Whether you pay your bills on time.
•How much of your available credit you actually use. It’s essential that you pay all your bills on time, all the time. In fact my personal rule is that I pay my bills on-line the day they arrive in the mail or earlier. Some companies will email you a reminder when your invoice is issued. If it is easier for you, set up automatic payments or reminder systems so that you are never, ever late. All it takes is a single missed payment to trash your credit scores – and it can take seven years for the effects to completely disappear. Better yet is to pay your bills early and ahead of the due date.
You also don’t want to max out any
of your credit cards ever, or even get close.
Keeping your credit use less than 30% of your credit limit (10% is
better) will help you get the best possible scores – and should help keep you
from getting over your head in debt as well.
Of course it is absolute best if
you can pay off your statement completely every
month. What I do is log onto my bank
every Friday and pay off what is due on my credit card. Then it doesn’t feel like a huge payment and
it also shows on my credit that I pay things early or ahead of the due
date. Paying your bill in full each
month is the best way to keep your finances in shape and build your credit at
the same time. If you even have to use a card which is a whole different
conversation I love to have with buyers.
The fastest way to establish a
credit history if you don’t have one is to “borrow” another’s record, either by
being added to a credit card as a joint account holder or by getting someone to
co-sign a loan or credit card for you.
Use it and pay off immediately even before the statement is issued. This takes a big commitment from someone else
to help you as you can mess up their credit if you are delinquent with
payments. Plus they can mess up yours if
they don’t pay what they owe if you share the card. Make sure it is well discussed and that you
are ready to both commit to paying the card off in full each month. Also check
with the company that holds the card to make sure they report to the credit
bureau for both parties and not just one or the other.
First let me say that Co signing is
an awful
idea. It changes relationships and family dynamics. I have seen it many times.
This system is only to be used as a worst case fix and must be done only by
people that understand credit completely! Having a co-signer can allow you to qualify
for loans you might not otherwise get.
The loan will show up on your credit report and, if you pay it off
responsibly or better yet very quickly, will help boost your credit
scores. In fact if you know someone that
would be willing to co-sign to help you borrow the money, you can let them keep
the money borrowed and pay the loan off completely in a month or two. Make sure you are able to do that when
setting up the loan.
Once again it must be someone you completely trust. This is a great way for parents to help their
children develop a credit rating. If you
default, however, you won’t be the only one who suffers. The co-signer has basically promised to make
good on this account, so any delinquencies will show up on their credit report
as well.
If you can’t get a regular credit
card, apply for the secured version.
These require you to deposit money with a lender; your credit limit is
usually equal to the deposit. Screen
your card issuer carefully. To be frank,
there are a lot of bad guys in this particular niche of the credit world. Some charge outrageous application or annual
fees and punitively high interest rates.
Your credit union, if you have one, is a good place to look for a
secured card. You can also check
Credit.com, CardTank.com or Bankrate.com’s list of secured credit card issuers.
Ideally the card you pick should
promise this:
•Have no application fee and a low
annual fee
•Convert to a regular, unsecured
credit card after 12 to 18 months of on-time payments
•Be reported to all three credit
bureaus
If the issuer doesn’t report to the
credit bureaus, the card won’t help build your credit history. To get the best credit scores, you need a mix
of different credit types, including revolving accounts (credit cards, lines of
credit) and installment accounts (auto loans, personal loans mortgages).
Once you’ve had and used plastic
responsibly for a year or so, consider applying for a small installment loan
from your credit union or bank. Keeping
the duration short – no more than a year or two – will help you build credit
while limiting the amount of interest you pay.
Beacon
or FICO Scores
Beacon or FICO scores are a single
number that summarizes your credit situation and shows lenders what kind of
risk you’re likely to be as a borrower.
The article below is a basic overview of their importance.
Beacon
Score Basics for Mortgage Hunters
Your Equifax Beacon Score tells
lenders how much of a risk you are, and hence it determines how much you’ll pay
for your next mortgage. So it’s
important to know what affects it.
Beacon scores range from 300 to 900
(a perfect score). The average Canadian
adult has a Beacon near 700. Many people
think you need to be in the 800’s to get great mortgage rates. That isn’t the case. Only 11% of Canadians
rank above 800, and it’s virtually unheard of to see a Beacon near 900. All you really need is 680-700 to get the
best mortgage rates. If you would like
to always like the power to negotiate the best mortgage rates then keep your
score over 700. Even 600 can get you a
decent enough deal if you can prove income and haven’t had any delinquencies
for at least a year. Although lower numbers pay higher interest. If however you
are self employed then you need super high numbers to get anywhere
As of October 15, 2008, 600 is the
minimum credit score for insured mortgages.
That means you will need at least a 600 score to qualify for mortgages with less than 20% down payment. If your score is below 600, you’re
what lenders call a “B” client (i.e. there’s issues with your credit that banks
won’t like). 1 out of 5 Canadians are in this boat, but don’t despair! Your credit can be fixed and there are still
lenders willing to give mortgages to the credit challenged if you have a big
enough down payment. Mortgages
for the self-employed, or for rental properties, often require higher scores.
Here’s a table showing the
approximate effect of different Beacon scores on mortgage interest rates. This is based on our anecdotal experience and
not empirical data. But it gives you a
rough sense for how rates go up as your Beacon score goes down.
Beacon Score Interest Rate
700+ The Best Rate
680-699 +0.10 – 0.20%
650-679 +0.30%
620-649 +0.40%
600-619 +0.50%
580-599 +1.5%
540-579 +2.00%
500-539 +3.5%
Assuming you want to improve your
credit (and who doesn’t?), you should know how the Beacon formula is
calculated. Here are the main criteria:
While no one knows the exact
formula (except the inventor, Fair Isaac Corporation), Beacon scores are
roughly based on:
Payment
History = 35%
of the weight of your score. Factors in
the regency of and number of payments over 30 days late, collections,
judgements and bankruptcies. A single
30-day late payment can drop your score 15-20 points!
Current
Debts = 30%
of the weight of your score. Considers
how much you currently owe (in absolute terms and compared with your credit
limits), how many creditors you owe money to, and how much you could owe if you
maxed all your available credit.
Age
of Accounts = 15%
of the weight of your score. The longer
your accounts have been opened the better.
You generally need at least three accounts over one year old.
Type
of Credit = 10%
of the weight of your score. Bank loans,
credit cards, and revolving credit accounts all impact you differently.
Credit
Enquiries = 10% of the weight of your score.
Numerous credit applications in the past 12 months is a no no. This is a big benefit of mortgage brokers,
who pull your credit only once for multiple lenders.
Besides the obvious (bankruptcies,
judgements, etc.) the top Beacon killers are:
•Payments over 30 days late
•Maxing out credit cards (i.e.
using of 70% of a high credit limit)
If you have a lot of maxed out
cards, bring them at least below 70% of their limit (Below 50% is better. Below
30% is best.). Your credit score can
jump considerably in as little as a month.
The moral is, know your credit
score and manage it carefully. Over
70-80% of Canadians have mistakes on their credit report.
Also when you calculate your
mortgage payments don’t just use today's great rates. Do the calculation at the
prime rates as well so that you know you can afford it if the rates go up. It
happens folks. Twice in my lifetime I have seen rates go over 10%....and I am
not that old. Lol.
My best advice for everyone though
is to listen to the Audio book called The Total Money Makeover by Dave Ramsey.
Available on the audible app on any phone, computer or tablet. Listen to it 3 times and it will change the way you think.