Credit. What is it? How is it affected? How can you improve it? All of these are important questions when it comes time to purchasing a property, no matter if it’s your first, second, or tenth time.
In this context, credit is referring to monetary resources being provided from one party (typically a bank, or credit agency) to a client with the understanding that this is a debt with promised payment at a later date. This includes things like credit cards (bank or store), lines of credit, car loans, student loans, and mortgage loans to name a few. Credit in turn carries an interest rate paid on the outstanding credit (the amount you owe). The rate can vary anywhere from 2 or 3% to upwards of 20%. Payments are made on the owing balance, whether you are paying out the full balance owing or making a minimum payment (typically the interest amount).
Now you could be wondering, what does any of this have to do with me purchasing a home? The answer is your credit score has a huge impact on qualifying for a mortgage, which most homebuyers require. Your credit score, or beacon score, is calculated based on a combination of the types of credit you have, their limits, any new credit, how long you have had these forms of credit, and most importantly your repayment history.
Most mortgage lenders generally require you have two existing forms of credit, with a minimum two years history and a combined limit of $4000 or more. What they are focused on primarily is your history of repayment. Do you consistently pay off your monthly balance? How many times have you been late? How many days have you been late? 30? 60? 90? These factors weigh heavily on a lender’s decision to fund your mortgage because they want to be sure their loan will be repaid. Failing to make your monthly payments, and failing to do so multiple times will negatively impact your credit score, as will having your score checked more than twice in a 30 day period, or requesting your limit be changed more than once in a 30 day period.
If any of what I have just said is causing you to panic, I just want to say: Stay calm. Relax. A poor credit score is fixable. It can take two months to several years to fully fix, but it is doable if you remember these key points:
- Always make your monthly payments. If possible make them in full, but at the very least make the minimum monthly payments, and make them on time. This will show a willingness to repay your debt, and a history of doing so.
- Do not make any major purchases (such as leasing a vehicle) while attempting to fix a credit score without having the ability to make the monthly payment on time, every time.
- Do not have your credit history checked more than twice, or request its limit be changed more than once in a 30 day period.
- Do not stop using your forms of credit. A lack of credit history does not improve your credit score. Small purchases, paid off in full, monthly will.