Give Yourself Credit

Before lenders decide on the rate at which they offer

you a mortgage, they want to know two things about

you: your ability and your willingness to pay back the

mortgage. For the first factor, they assess your income to debt

ratio. To determine your willingness to repay the mortgage,

they examine your credit score.

Your credit score is between 350 (high credit risk) and

850 (low credit risk). A good credit score enables you

to finance large purchases such as a home, business,

automobile, renovations, electronics, and large home

appliances at lower interest rates. By understanding what

makes a good credit score, you can start on the path to

greater financial freedom.

Credit scores only consider the information in your

credit profile. They do not consider your income, savings,

down payment amount, or demographic factors such

as gender, race, nationality, or marital status. The credit score takes into consideration the

factors relevant to an individual's

willingness to repay a loan.

The data for your credit score is

compiled from banks, retailers, and

other lenders.

The most important thing is to

know your credit score and to ensure that

your credit history is correct. For a small fee,

you can quickly get your credit score and report from Equifax

(www.equifax.ca).

There are five factors that make up your credit score, and

each factor weighs differently. Here's the breakdown, along

with some tips to help strengthen your score:

35 per cent-Payment history: Payment history is the

largest component of your credit score. It reflects how

consistently you pay your bills on time. Late payments,

collections, past due accounts, and public records such as

bankruptcies can seriously hurt your score.

30 per cent-Amounts owed: Amounts owed takes into

account how much is owed on all your accounts, how many

accounts you have that carry a balance, and the percentage of

available credit that you are using. Keep credit card balances

under 50 per cent of the available limit at all times, and when

preparing to make a large purchase, bring those balances

down to under 30 per cent at least three months before

applying for a mortgage.

15 per cent-Length of credit history: This factor

considers how long you have had credit, the length of time

each account has been open, and the time since recent

account activity. Accounts that have been active for 10 years

are very good, whereas accounts that are six months old aren't

as good. When applying for a mortgage, consumers should

keep long-standing accounts open because it will help

increase their credit score.

10 per cent-New credit: This factor includes the

number of recently opened accounts, the number of credit

inquiries, and the amount of time each account has been

open. This portion of the score also examines how often you

apply for credit. When applying for a mortgage, it is best

that you do not open or apply for new credit accounts.

When shopping for a new mortgage or auto loan, it pays to

plan ahead so that you do all of your shopping within a

focused period of time.

10 per cent-Types of credit used: A variety of credit is

the best way to develop a good score. The most important

consideration is to be selective about the type of credit you

apply for because this can improve your score. To the

scoring system, third party financed credit cards, such as department store credit cards, are generally considered low

quality credit because the holder of these third party cards

may appear desperate for credit.

Your credit report must contain at least one account that

has been open for six months or more and at least one

account that has been updated in the past six months for

you to get a credit score. This ensures that there is enough

information in your report to generate an accurate score. If

you do not meet the minimum criteria for getting a score,

you may need to establish a credit history prior to applying

for a mortgage.

Your credit score is very important to your financial health

and to the stability of your financial future. A strong credit

score will help you finance large purchases at the best

possible interest rates. A few simple changes now can lead

to thousands of dollars in savings over the life of your

mortgage. Take control and start making the necessary

changes today to ensure a strong financial future for you and

your loved ones.

Jeff Hui is a mortgage consultant with Mercury Mortgages

and can be reached at jeff@mercurymortgages.com or

905-273-4234.

Mistakes that can lower your credit score

Since many things depend on having a high credit score,

it is a good idea to be aware of practices and habits that

can lower your score or negatively affect your financial

reputation.

- Not paying the minimum amount required on your credit

card or other bills will compel creditors to report that

your account is past due, which is a bad mark on your

credit history. Additionally, paying less than the

minimum will result in late fees and additional interest

charges that can really hurt your finances.

- Keeping your debt levels too high will alarm potential

creditors. If they see that you already owe a lot of money

on credit cards and other loans, they might balk at your

ability to repay the loan. This will, of course, reflect

badly on your credit score.

- Most people rarely look at their credit report until they

apply for a loan or have been denied one. You should

periodically check your credit report to determine if

there is any inaccurate or missing information that

could raise your borrowing costs and therefore lower

your credit score.