8 Credit Rules You Need to Know to Get a Mortgage

KellyHudsonMortgages • March 7, 2016

Credit Score - Poor Mar4-2016

If you plan to buy a home, you need to know how to manage your credit NOW!


Managing credit correctly requires some discipline. If you let your spending get out of control and take on too many credit cards or loans, you could face big money troubles, making it challenging to qualify for a mortgage.

When it comes to borrowing money, it’s important to have guidelines.

Here are 8 rules of credit that everyone should follow so your finances and your credit score stay in good standing.

When you are getting a mortgage, banks want to know how you’ve handled credit in the past, which gives them an idea of how you will handle your mortgage payments. Furthermore, a high credit score will give you the best mortgage interest rates when buying your home.

1.  Pay your bills on time every time . Spotless payment history is crucial when it comes to establishing a good credit score. The payment history accounts for the largest percentage of your credit scoring and one missed bill will cost you. A recent late payment can cause up to 100-point drop on a credit score of 780 or higher.

  • Missing your deadline by a couple of days, might not seem like much of a big deal to you, but credit companies will be very quick to levy late fees and even possibly increase your APR%, especially if you have been late on more than one occasion.
  • To avoid both pitfalls, it’s a good idea to set up auto pay on car, student or home loans so you don’t miss a payment.
  • For credit cards, the best plan is to pay off everything you owe. If you can’t pay everything off, you MUST make the minimum payment before the due date.

2.  High credit balances = Low credit scores . The closer you get to your credit limit, the lower your score.

  • After payment history, credit utilization ratios (how much credit you have available versus how much you are actually using) plays a big role in shaping your credit profiles.
  • To keep your credit score from taking a dive, it’s important to avoid hitting you credit limit. Instead, try to only utilize 25-50% of your available credit at any given time.
  • If your balance goes over your limit, your credit is going to be lowered significantly.

3.  You need to have established credit (the rule of “2”) Credit agencies and lenders are looking for:

  • 2 different “trade lines” credit card, line of credit, loans (not including student loans or mortgages) 
  • minimum of 2 years’ old
  • credit limit of at least $2000-$2500

4.  Some types of credit are better than others

  • Rent & utilities don’t show up on your credit report.
  • Student loans, cell phones and mortgages show up on your credit report, but don’t affect your credit score.
    • If you have missed payments on these they will be looked at negatively when trying to get credit, but don’t change your score.
  • Credit that shows up on your credit report and builds your score: credit cards, lines of credit and loans

5.  Be careful with joint credit (spouse, family, friend)

  • If you have joint credit you are both 100% responsible for the amount outstanding.
  • If a spouse uses a card and doesn’t make the payment, this will affect both of your scores, since you are both considered 100% responsible.
    • To remove someone from the account, the account must be paid in full.

6.  Applying for more credit… lowers your score

  • Signing up for many credit cards can negatively affect your credit score.
  • Too many cards can hurt your rating even if you don’t use them because you have the money available for you to borrow.

7.  Closing your credit account… lowers your score

  • Your credit score is customarily affected by the last 30-90 days of credit activity. Therefore, if you close an active account (established for over 2 years) it could lower your score by 100 points +
  • The solution is to ensure that you have 2 other active credit lines with over 2 years on them. Then your score will not be lowered as much.
  • If you are planning to get a mortgage it is best to close your account after , not before.
  • If you are offered an upgraded card by your bank you should keep the old one active for at least 2 years before closing.

8.  Don’t let someone else wreck your credit – be aware of your credit score

  • You should know your credit score before going home hunting. If your score has blemishes, you need to focus on rebuilding it prior to making an offer.
  • Monitor all your accounts for any unusual activity
    • new charges, forgotten charges or fraudulent charges.
  • Up to 18% of credit reports have mistakes, so you need to check your credit reports yearly.Credit Score - Excellent Jan4-2016

One way to improve your credit score:

  • use a credit card haven’t used for a while, that you have a long history, (with stellar payment history)
  • once you use the “old” credit card, pay it off immediately

For further information on Credit Score check out my blog Solving the Puzzle – 5 factors used in determining your Credit Score

If you have any further questions about credit, mortgages or buying a home, please give me a call – I am happy to have a chat.

Kelly Hudson

Mortgage Expert

Mobile: 604-312-5009

Kelly@KellyHudsonMortgages.com

www.KellyHudsonMortgages.com


 

Kelly Hudson
MORTGAGE ARCHITECTS
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