Improving your credit score takes time. Credit scores range from 300 to 900. A high credit score indicates a low delinquency risk to a creditor, while a low credit score indicates a higher chance of being delinquent on your account. The higher your score the more likely you to qualify for premium reward credit cards, loans and mortgage with lower interest rates.
There are 5 factors that affect your credit score:
- Payment History 35%
- Utilization 30%
- Length of Credit History 15%
- Type of Credit products 10%
- Amount of Inquiry 10%
There is a myth that if your credit is pulled more than once in a month your score will be affected greatly. That’s not necessarily true. This line is used as a way of preventing competition. As you can see inquiry only amounts to 10% of a 600-credit score, while a late payment has a rating of 35%.
Borrowers who have late payments usually have a high utilization which now amount to 65% and of they do any inquiry that adds another 10%, so we usually hear borrowers with high utilization and some payment pressure saying their score will be reduced and it will mostly because of the other two factors.
Improving your credit score
- Make your payments on time and avoid late payments, defaults, repossessions, foreclosures and third-party collections.
- The target that optimizes your credit score is 10% utilization. Utilization over 75% reduces the score and it gets lower the higher the utilization. If you are going to make a payment it should be the two to three days before the credit bureau reports, that way you would have affected 65% of your score.
- Even though it only affects 15% of your score the longer you have a trade line on your credit bureau positively the impact on your credit score if the payment history were on time. If the payments delinquent even if the cards or loan was settled, they will stay on the credit bureau for 7 years. A collection item, seven years after being paid, a consumer proposal would be purged three years after being paid and a bankruptcy for 7 years.
- If you are thinking of getting a big-ticket item like a house or a major refinance and want to boost your credit score to qualify, you could call your credit card issuer and apply to increase your credit limit if your account is in good standing. The if approved the utilization would be lower and the score would increase. This would show up in the score a month later.
- Review your credit report at least once a year. Creditors sometime forget to report to the credit bureau that a debt has been paid mostly collection debt, but this also happen with car loans, student loans etc. It doesn’t happen often, but it does sometime, and you might be declined a loan because of this. Always ask for a letter from your creditor indicating that the debt has been paid in full. Once you review your credit, if there are any inaccuracies you would be able to address with the letter.
Following these steps and understanding your credit situation should alleviate the stress of getting a mortgage or car loan. These are general guidelines but if you are planning on getting a mortgage whether you are looking to buy a house or refinance your mortgage an evaluation of your current credit situation, contact us and will assist us at Sunlite Mortgage in offering you the best mortgage solution for your unique situation.
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