Understanding and maintaining a good credit score is crucial for securing loans and financial health. This guide offers tips on reviewing your credit report, following the 2-2-2 rule, and keeping credit balances low. Learn the factors that affect your score and how to improve it, ensuring you remain a "good investment" for lenders.
For most people, credit score isn’t something you spend much time thinking about. Especially if you are someone who is making good money and paying all your bills on time, but it never hurts to be aware of your current score and ensure you are maintaining it – even when you’re not in the market for a home.
The reason your credit score is so important is because it tells lenders the basic story surrounding your credit. It essentially indicates whether or not you are a “good investment” by relaying how long you’ve had credit, your ability to pay back that credit and how much you currently owe.
Ideally, a credit score above 680 puts you in a good position to get financing. However, as a mortgage professional, I have seen hundreds of different financial portfolios and I know that the ideal credit score is not possible for everyone. While having a score of 680 will allow you to acheive the highest borrowing power, I have access to a variety of mortgage options to meet the needs of ALL my clients – no matter what your score is.
That said, if you are looking to improve or maintain your current credit score, there are a few tips I wanted to share with you!
Review Your Current Credit Score: The first step is to take a hard look at your current credit report and review your credit score for any old or incorrect information. Mistakes are more common than you think! If you find any errors, make sure to have them corrected or removed so as not to impact your future buying power.
2-2-2 Rule: This is a great rule for anyone looking to build up their credit. Lenders typically like to see 2 forms of revolving credit (i.e. credit cards) with a limit of no less than $2,000 and a clean history of payment for 2 years. If you’ve been advised to get a couple credit cards but have locked them in a vault where only a sorcerer’s spell can access them, you’re going down the wrong path. The goal is not just to have credit but to show potential lenders that you know how to use it responsibly!
Maintaining Your Credit Balance: Lastly, a great credit score means keeping a balance on your cards that is BELOW 30% of the overall limit. For a card with a limit of $2,000, this means having no more than $600 of it in use. If the balance is over 30% of limit and you don’t have the cash to pay it down or off, then simply request a limit increase! If granted, you are now at a lower utilization with no upfront cash needed. It is also a good idea to check if your credit card requires an annual fee and make sure you are paying that off too.
How Is Your Credit Score Calculated?
Your credit score is calculated using five factors:
Payment history (35%)
Debt utilization ratio (30%)
Credit history (15%)
Credit application frequency (10%)
Credit diversity (10%)
Once you have your credit score where you want it, it is important to maintain that score by following the above guidelines. Remember, even if you can only pay the minimum amount due, it is important to be making those payments and recognizing the requirements to keep your financial health in check.
Most of the information is automatically removed after 6-7 years (although not purged) so that student loan payment you missed 20 years ago won’t be haunting your score today. If you do happen to be in the market for a home, and want to learn more about your credit score and borrowing power, please don’t hesitate to reach out to me!
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A note
From Cam Wilson:
Wilson Mortgage is proud to partner with Dominion Lending Centres, one of Canada’s most trusted mortgage networks. This partnership allows us to offer our clients a wide variety of mortgage solutions tailored to their unique needs. Whether you're looking for competitive rates, flexible terms, or specialized financing options, our access to Dominion Lending's extensive resources ensures that you receive the best possible service. Serving the Niagara Falls and St. Catharines area, we combine local expertise with the strength of a national network to help you achieve your home financing goals with confidence and ease.